What are the Best Tips for Borrowing Against a 401k?

Scott Daniel
Scott Daniel
Information about 401k plans.
Information about 401k plans.

In times of financial trouble, some people may consider borrowing against a 401k in order to help pay for various planned or unplanned expenses. For someone considering this option, it's important to gain as much information about the process, the advantages, and the disadvantages before making any decisions. He will want to familiarize himself with all the documentation associated with the current account and all the documentation involved with applying for a 401k loan. He may also want to speak to a professional financial adviser, as well as work out all the different costs that are associated with borrowing against a 401k. It's also important to budget for and carefully manage paying back the loan.

The most important step for someone considering a 401k loan to take is to be educated. This is one of those times where it's necessary to read through the fine print, not only for the 401k account but also the paperwork for the loan. Borrowing against a 401k brings with it certain criteria like how much time is allowed to pay the loan back, interest rates, and whether or not the individual can continue to contribute to the retirement account while he still has an outstanding loan. If a 401k is through an employer, the person may want to talk with his human resources representative to clear up any confusion.

Borrowing against a 401k may bring along with it unexpected costs and fees in addition to the interest being paid. There may also be tax penalties involved; for instance, while an individual may contribute to a 401k account pre-tax, paying off 401k loans is a taxable expense. It's important, therefore, for a borrower to go through the numbers before making any final decisions. The fees, penalties, costs, and interest will add up and may make borrowing against a 401k a less-than-perfect option. If that is the case, other options may be considered.

Some potential borrowers may also find it very valuable to discuss all the various financial options with an experienced professional. If the retirement account is through an employer, they may have an individual on hand who can answer any questions. If not, it would be wise to seek out professional advice. An interested individual may discuss with a professional their financial situation and what options to consider. The expert may be able to present some different and better options to help them pay those expenses.

Borrowing against a 401k certainly shouldn't be the first option someone considers when money is tight. Borrowers should only pursue this option for necessary expenses, not vacations or toys. If, after researching his options, a person still feels a 401k loan is the best choice, and he is able to get a loan, he should set up a specific budget and timeline for paying it back — and then stick to it.

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    • Information about 401k plans.
      Information about 401k plans.