401(k) Loans Can Bite You
FiLife Take: Dipping into your 401(k) for cash isn't a good idea. Take it from the experts, you're likely to get into more financial trouble looking for fast cash in your retirement plans than if you just budget and spend less. Get the facts right here.
Feeling a cash crunch? Think twice before tapping into your 401(k) account -- especially as the economy slows.
A growing number of debt-laden workers are borrowing from their retirement plans. In a recent survey by Transamerica Center for Retirement Studies, 18% of workers had a retirement-plan loan in 2007, up from 11% in 2006. These loans can be tempting because they don't require borrowers to have pristine credit and they carry relatively low interest rates. What's more, borrowers pay the interest to their own account.
But 401(k) borrowers can face serious pitfalls. One big risk: Leaving your job before the loan is repaid. If that happens, you'll have to repay the full remaining balance right away, or else face income taxes on the unpaid balance and, likely, a 10% penalty if you're under age 59½.
As the economy slows, raising the prospect of more layoffs, that scenario looks particularly scary.
Would-be 401(k) borrowers should also consider how the loan will affect their retirement savings. Given the stock market's recent declines, participants now borrowing from plans may be selling assets at depressed values to fund their withdrawals.
In addition, the interest you pay to your account may be less than the return your money would have earned if you'd left it invested in the 401(k).
Visit WSJ.com now for additional insight on the most important stories of the day.
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