There are a number of pros and cons associated with taking a loan from your 401K plan. There are definitely situations where taking a 401(k) loan makes sense but there are also number of situations where it should be avoided. Before taking a loan from your 401(k), you should understand:
• How 401(k) loans work
• How much you are allowed to borrow
• Duration of the loans
• What is the interest rate that is charged
• How the loans are paid back to your 401(k) account
• Penalties and taxes on the loan balance if you are laid off or resign
• How it will impact your retirement
Sometimes Taking A 401(k) Loan Makes Sense
People are often surprised when I say “taking a 401(k) loan could be the right move”. Most people think a financial planner would advise NEVER touch your retirement accounts for any reasons. However, it really depends on what you are using the 401(k) loan for. There are a number of scenarios that I have encountered with 401(k) plan participants where taking a loan has made sense including the following:
• Need capital to start a business (caution with this one)
• Resolve a short-term cash crunch
• Down payment on a house
• Payoff high interest rate credit cards
• Unexpected health expenses or financial emergency
I will go into more detail regarding each of these scenarios but let’s do a quick run through of how 401(k) loans work.
Contact Michael Ruger with Questions: 518-477-6686 or mruger@greenbushfinancial.com
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