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Like struggling financial institutions that have turned to the Federal Reserve, workers are looking to their 401(k)s as lenders of last resort. A recent survey from the Transamerica Center for Retirement Studies found that 18% of workers took out loans last year, up from 11% in 2006.
Eyeing the 401(k) piggy bank is understandable; lenders are stingier, the economy is shakier, and the value of homes and portfolios has shrunk. Little wonder that money-management firm Reserve Solutions stepped up promotion of its ReservePlus debit card this year. If your employer offers it, you can tap your retirement savings at the mall or at an ATM.
But unless your straits are truly dire, or your need is both short-term and finite -- say, you're using the money to pay for a one-time medical procedure and not because your mortgage reset -- leave the money in the account, where compound returns work magic.
Let's say a 35-year-old, who has been contributing $264 a month and has a $30,000 balance, takes out a $10,000 loan at current rates for five years (assume contributions stop for the life of the loan, as usually occurs). The borrower will forgo $145,000, or 20%, at retirement age -- even though the loan plus interest is plowed back into the 401(k), according to calculations by T. Rowe Price.
POSTED BY: Joseph (June 05, 2008 01:27 PM)
There is something seriously wrong with your personal finance habits if you need to raid your 401(k). Learn to live on less and be happy doing it too.
POSTED BY: Stan (June 06, 2008 10:43 AM)
I disagree...It is a gamble and according to your financial situation. The above is only one scenario. I took out 30k in early 2000. Stock market dropped so I am reinvesting at a lower rate. In this scenario it works out....
POSTED BY: John (June 06, 2008 05:32 PM)
You're leaving out the huge tax disadvantage of borrowing from your 401K. When you take the loan, this is not a taxable event. However, the payments taken out of each paycheck to repay the loan are AFTER taxes are taken out. When you take the money out at retirement, you're taxed again. Why would anyone volunteer to pay taxes on their money twice?
