Weigh the Pros and Cons of 401(k) Loans
The interest you pay yourself on money you borrow may not match what you could earn if the money stayed invested.
I’m thinking about taking a loan from my 401(k). Is this a good idea? Does the Federal Reserve’s interest-rate increase affect 401(k) loans? --J.P., New York
The Fed’s rate hike, and any further increases, will affect new borrowers. Most 401(k) plans charge the prime rate plus one percentage point, and some charge prime plus two points. The prime rate rose from 3.25% to 3.5% in December. Rates on existing loans will not change.
With a 401(k) loan, you borrow your own money and pay the interest back to your account rather than to a lender. But consider the costs when comparing loan options. Some people reduce or stop contributions to their account while they’re repaying the loan. If you leave your job, you generally have to pay back the loan within 30 to 60 days of your last day on the job or you’ll owe taxes on the balance plus a 10% penalty if you’re younger than 55.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Also, the interest you pay yourself on the money you borrow may not match what you could earn if that money stayed invested in mutual funds in your account. Most 401(k)s take the loan amount proportionately from each of your funds. You can minimize the impact by rebalancing your portfolio to shift more money from fixed-income funds into stock funds and consider the loan repayments as a fixed-income investment, says Marina Edwards, of Towers Watson, a human resources consulting firm.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.
-
Is a Phased Retirement Right for You?
Want to keep working, just not as hard? A phased retirement may just be the answer.
By Kimberly Lankford Published
-
Four Tips to Make Your Sales Presentation a Winner
Being prepared and not being boring can go a long way toward persuading a potential customer to buy into what you’re offering.
By H. Dennis Beaver, Esq. Published
-
More Signs of Belt-Tightening and a Slowing Economy: The Kiplinger Letter
The Kiplinger Letter Although fewer banks are tightening lending standards, more businesses and households are feeling the squeeze.
By Rodrigo Sermeño Published
-
The Fed Holds Interest Rates Steady
The Fed cautions that inflation remains high and it is prepared to adjust its monetary policy ‘as appropriate if risks emerge.’
By Esther D’Amico Published
-
5 Ways to Shop for a Low Mortgage Rate
Becoming a Homeowner Rates are high this year, but you can still find an affordable loan.
By Daniel Bortz Published
-
Banks Lost Billions on Bad Loans Last Quarter: Kiplinger Economic Forecasts
Economic Forecasts Bank deposits are also down, and more people are tapping into their savings.
By Rodrigo Sermeño Published
-
Bond Yields Highest Since 2008
The yield on the 10-year Treasury increased 1.6 basis points to reach 4.258% on Wednesday afternoon, up from 4.22% on Tuesday. This is the highest level it had been since June 13, 2008.
By Erin Bendig Published
-
What Is the Federal Funds Rate?
The federal funds rate can impact a host of borrowing costs, and thus the entire U.S. economy.
By Jeff Reeves Last updated
-
Is It Prime Time for Money Market Funds?
The Fed's interest rate hike could be a boon for savings accounts. Here's why.
By Seychelle Thomas Published
-
What the Fed's Rate Pause Means for Savings
At the latest policy-setting meeting, the Fed held interest rates steady. Here's what that means for savings rates.
By Erin Bendig Last updated