The Downfall of Borrowing from Your 401(k) Plan

Many people today think that borrowing from their 401(k) plan is a smart thing to do. They figure they are only borrowing money from themselves. A Duke University/CFO Magazine survey found that in December 20% of companies have seen an increase in withdrawals and loans on 401(k) accounts, often to cover mortgage payments to avoid foreclosure or bankruptcy. Some people who have found it difficult to get home equity loans may have some advantages in borrowing from their 401(k), but in the long term the disadvantages clearly outweigh the advantages. One of the major disadvantages is that for many people this is their main retirement savings and taking that withdrawal will inhibit them from reaching their financial goal to retire. Another disadvantage is not making timely payments can have dramatic consequences to that person and can cost them a lot more in the long run.

According to Employee Benefits Research Institute, about half of the 401(k) plans allow the participants to borrow from it. Many allow employees to borrow up to half of their plan but no more than $50,000 total. Typically, borrowers get up to five years to pay back the loan using payroll deductions. But they also have to pay interest on the money. The interest proceeds then become part of the 401(k) balance.