3 Reasons to Borrow Money from Your 401(K)
September 11, 2020
By Rahul Iyer
There are cases in life when borrowing money from your 401(k) can be a feasible option; nonetheless, experts will tell you that you should not touch your 401(k) because you are depriving your retirement years of important financial support. This is good advice and you should follow it if you are not borrowing funds from your 401(k) for a wise reason.
Does it Make Sense to Borrow from Your 401(k)?
In cases where you are hit unexpectedly with a major financial crisis where you need a large lump-sum of cash short-term, borrowing from your 401(k) may be a good option. Taking a loan against your 401(k) account is often easy to access and comes with a much lower cost than other types of loans such as a title loan, pawn, a pay-day loan or even a personal loan. The money you borrow will not be taxable if you stay within the parameters of the loan and make your payments in a timely fashion.
3 Reasons to Take a Loan Against Your 401(k)
There are a number of reasons that one should consider a loan against your 401(k). Let us take a look at some of them.
1. Easy and convenient access:
Borrowing from your 401(k) is a simple process. You don’t normally need to fill out lengthy application forms or go through credit checks. It also does not have an effect on your credit score. Some 401(k) plans allow for a virtual application process which helps you to gain access to a loan from your retirement account balance in a few clicks online. The funds are typically made available to you in a few days while maintaining your privacy.
2. Ease of repayment:
While you are typically given a long time to repay loans that you take against your 401(k), you are permitted to make early repayment without facing penalties. You are also able to repay your 401(k) via payroll deductions. Bear in mind that the payments you make on this loan will be post-tax dollars.
3. Cost-effective loan option:
One of the most significant advantages of taking a loan against your 401(k) plan is that there are hardly any costs involved in the process if you are borrowing to meet a short-term financial need. Where you are able to justify it, you don’t need to be ashamed of borrowing from your retirement savings account. There are a number of benefits that will result from you borrowing from your 401(k) as opposed to other loan types that may have high-interest rates. As long as you carefully assess the opportunity costs involved in taking a loan against your 401(k) and find it to be a positive option, there is no issue. It is wise to consult with a financial advisor when you are making a decision like this.