Is it Good Time to Borrow on 401(k) Retirement Plan?
The purpose of funding your 401k is to save for a comfortable retirement. Invading that retirement program for current needs can be dangerous to your long-term wealth, so you need to use caution when taking out a loan on your 401k. In some cases, however, a 401k loan is the best solution to a genuine financial emergency.
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Employer Restrictions
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If you are considering a loan from your 401k plan, it is important to find out exactly how much you can borrow. Many employers limit the availability of 401k loans to a specific percentage of the balance in the account, often around 50 percent of the total balance. If your 401k plan is doing well, that means you could afford to borrow more money. But if your account is down, the amount you can pull out in the form of a loan will be limited as well.
Other Options
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While it can sometimes make sense to borrow from your 401k plan, it is always a good idea to explore your other options before invading such a valuable tax-deferred retirement plan. Even though you are paying the money back to yourself, there are many downsides to borrowing from a 401k. You are not permitted to contribute to the 401k while the loan is still outstanding, and that could set your retirement program back many years. Even so, if your only other option is a high-interest loan or a high credit card balance, a 401k loan could be your best option.
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Keep Your Loan to a Minimum
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If you do find that a 401k loan is the best choice, limit your borrowing to the amount you absolutely need. Keeping your 401k loan to a minimum benefits you in a number of ways. For one thing, the less you borrow the faster you can pay back the loan and the sooner you can get your retirement savings back on track. Keeping your borrowing to a minimum also means that there is more money remaining in your 401k, allowing it to grow and give you a potentially larger nest egg.
Leaving Your Job
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One often overlooked risk of the 401k loan is that you could be required to pay back the entire loan amount if you lose your job, whether your leaving is your idea or that of your employer. If you are thinking about switching jobs, you need to do your homework and determine whether or not this provision applies. The same is true if you have any doubt about the security of your position or the long-term viability of the company you work for.
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References
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