Should I borrow from my 401(k) to pay my bills?August 13, 2012: 6:30 AM ET
I had a few unexpected bills come up this year and I put them on my credit card. I can get a loan from my 401(k) to pay off the balance. What is your view of this? — John E.
A 401(k) loan is riskier than it may seem. It must be repaid, with interest, in five years or less. If you don't make your payments on time the funds you received will be taxed as income, and you could be hit with an additional 10% early withdrawal penalty as well. "A 401(k) loan can be fine if you are truly in a position to pay it off on time," says Lew Altfest, president and principal adviser at Altfest Personal Wealth Management in New York. "But in general it's not a good idea."
That's not just because of the risk of taxes and penalties. The savings you pull out of the plan won't be able to produce any investment growth until you pay back the money. And you'll not only miss out on that growth — you'll lose the chance for it to compound in the future.
So before taking a 401(k) loan consider other options, such as a tax-deductible home equity loan. "Interest rates are low for home equity borrowing," says Altfest. "I suggest using this type of loan and leaving your retirement savings untouched."
— Austin Kilham
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