Should You Borrow From Your 401(k)?

A 401(k) is a great tool for saving for retirement.  Most of us worry about having a enough money for retirement and 401(k) allows for reducing taxable income and it also is an exempt or protected asset from most all creditors.  In counseling individuals with financial problems, I am often asked whether a 401(k) loan is a good idea. It really just depends. A recent article on CNBC suggests that it is never a good idea.

401(k) Loans

“Experts” argue that account balances on these accounts are far below the amount necessary for retirement and many do not advise taking out these loans.   Currently, 401(k) plan participants can borrow with paying taxes or the 10% penalty for early withdrawal on as much as 50% of their account balance up to a maximum of $50,000.00.  The Center for Retirement Research at Boston College reports that 11% of people with 401(k) accounts borrow from them each year and somewhere around 20% have an outstanding loan balance.  Other experts suggest that allowing loans in a 401(k) can potentially increase participation rates and even the amount people are willing to contribute because the loans are available.  The Center for Retirement Research found outright withdrawals and cash-outs to ultimately reduce the value of retirement wealth by about 25%.

You are ultimately in charge of your finances, but it may be helpful to seek the advice of an attorney with the skills and knowledge to guide you through the pros and cons of borrowing from a 401(k) if you are in a financial hardship.  There is not a straight yes or no answer, because it really depends on the situation.  It may be that bankruptcy is a good option and you would be better served to leave your 401(k) alone.  Our offices offer a free, no obligation consultation if you are having financial difficulties.