credit & debt

4 Reasons It's a Bad Idea to Borrow From Your 401(k)

The hit to your nest egg may be greater—and last longer—than you think.

Household debt is on the rise, driven by increases in student loans. A Charles Schwab survey found that borrowers are tapping nest eggs, too, with one in four 401(k) participants surveyed having borrowed against their accounts.

Some loans were hardly essential: 9% of borrowers tapped a retirement fund to “buy something special”; 4% did so for a vacation.

Borrowing against your 401(k) is rarely a good idea. Here are four reasons:

1. You may rationalize that you’re paying interest to yourself, so the loan doesn’t cost you anything. But if you’re earning 10% on the investments in your 401(k) (the long-term average for big-company stocks) and paying 4.25% interest (the current average) on the loan, you’re shaving your return by nearly six percentage points, plus all of the compounded growth on those earnings.

2. Borrowers often stop contributions while loans are outstanding, compounding the long-term hit to their nest egg.

3. You’ll repay the loan with after-tax money, which means, unless you’re borrowing against a Roth 401(k), the interest you pay will get taxed again when you withdraw it at retirement.

4. And if you leave your job for any reason, you’ll have to pay the loan back, typically within 60 days of leaving. If you can’t, you’ll owe taxes on the balance and, if you’re younger than 55, a 10% penalty as well.

Most Popular

11 Good Reasons to Cancel Amazon Prime
Budgeting

11 Good Reasons to Cancel Amazon Prime

You probably aren't using most of the perks tucked into that $119 annual fee -- which you don't need to pay to get the free Amazon shipping you crave.
April 13, 2021
2021 Child Tax Credit Calculator
Tax Breaks

2021 Child Tax Credit Calculator

See how much money you'll get in advance under the new child tax credit rules for 2021.
April 14, 2021
Monthly Payments of the 2021 Child Tax Credit Will Begin in July
Coronavirus and Your Money

Monthly Payments of the 2021 Child Tax Credit Will Begin in July

After doubts about whether it was up to the task, the IRS says it's on schedule to start sending monthly child tax credit payments this summer.
April 13, 2021

Recommended

What You Need to Know about College 529 Savings Plans
529 Plans

What You Need to Know about College 529 Savings Plans

Do you know how much you’re able to contribute or what the funds could be used to pay for? How about how contributing affects your taxes? Check out th…
April 14, 2021
37 Ways to Earn Extra Cash in 2021
business

37 Ways to Earn Extra Cash in 2021

We flag a wide variety of cool side hustles to earn bonus bucks to cover expenses expected and unexpected as we begin to emerge from the pandemic lock…
April 8, 2021
10 Questions Retirees Often Get Wrong About Taxes in Retirement
retirement

10 Questions Retirees Often Get Wrong About Taxes in Retirement

You worked hard to build your retirement nest egg. But do you know how to minimize taxes on your savings?
April 7, 2021
The Hazards of Buy Now, Pay Later
Smart Buying

The Hazards of Buy Now, Pay Later

Breaking up payments can make a big purchase seem cheaper, which can tempt you to overspend.
March 31, 2021