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Straight talk from the money editor
A friend of mine, against my advice, decided to take a loan from his 401(k) plan. He understood the downside, but was confident he could repay the loan with the automatic paycheck deductions. I still think it was a very bad idea and, since he didn't listen to me, I will share my argument with you in the hopes you never tap your 401(k). First, by borrowing money from that 401(k), you remove it from investments in the market, forfeiting potential gains. You ultimately contribute less to your retirement because a portion of new contributions goes toward paying off the loan. Also, you earn and pay taxes on wages and use those after-tax funds to repay the loan. Finally, if you leave your employer before the loan is repaid, any outstanding balance may be treated as a taxable distribution to you unless entirely paid back. Many smart financial professionals believe that borrowing from your 401(k) plan is the best way to destroy your retirement-planning effort. I agree. For more cool stuff like this, follow me on Twitter @jimpavia. |
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