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

25 Best Kirkland Products You Should Buy at Costco
Smart Buying

25 Best Kirkland Products You Should Buy at Costco

Many of warehouse club Costco's store-branded Kirkland Signature items get high marks for quality and value. Check out our picks.
July 21, 2021
Warning: You May Have to Pay Back Your Monthly Child Tax Credit Payments
Tax Breaks

Warning: You May Have to Pay Back Your Monthly Child Tax Credit Payments

Unlike stimulus checks, you might have to repay your monthly child tax credit payments if you get too much money from the IRS.
July 16, 2021
Will Monthly Child Tax Credit Payments Lower Your Tax Refund or Raise Your Tax Bill?
Tax Breaks

Will Monthly Child Tax Credit Payments Lower Your Tax Refund or Raise Your Tax Bill?

Everyone loves receiving large sums of money from Uncle Sam. But people who take advance child tax payments may take a hit on next year's tax refund.
July 31, 2021

Recommended

Here’s What to Do with the Money Left Behind in Old 401(k) Accounts
401(k)s

Here’s What to Do with the Money Left Behind in Old 401(k) Accounts

First off, don’t lose track of it! You’d be surprised how many people forget about their old 401(k)s.
July 25, 2021
New Perks From Our Best Rewards Cards
Smart Buying

New Perks From Our Best Rewards Cards

No annual fee, new tiered rewards and more cash back are some of the offerings.
July 24, 2021
25 Best Kirkland Products You Should Buy at Costco
Smart Buying

25 Best Kirkland Products You Should Buy at Costco

Many of warehouse club Costco's store-branded Kirkland Signature items get high marks for quality and value. Check out our picks.
July 21, 2021
21 Best and Worst Things to Buy at Aldi
Smart Buying

21 Best and Worst Things to Buy at Aldi

The German supermarket chain is known for low prices, but not every item on Aldi's shelves is a bargain. See our list of the best and worst buys.
July 14, 2021