Reasons why you should never borrow from your 401(k)
As much as you may want to borrow from your 401 (k) plan- don’t. Dipping into your 401(k) plan can have serious consequences. More and more 401(k) plan participants are exercising the option to apply for loans against their retirement savings; however, experts advise that a 401(k) plan should be kept until retirement rather than be used as a piggy bank. Borrowing from your 401(k) balance will affect your long-term investment plan, which could affect you in a huge way in the future. Here are some reasons why you should never borrow from your 401(k):
No saving occurs
Most 401(k) plans have a provision that stops people from making extra contributions until the balance of the loan is repaid. The prospect of saving money while servicing the loan payment at the same time is almost impossible for most people; even for 401(k) plans that do not have this provision. The whole purpose of having a 401(k) plan is to save for future retirement; borrowing from your loans defeats the purpose of having the plan in the first place.
You’ll lose money
If you are not making any payments, not only is the balance of the money borrowed missing on any growth in the bond or stock market, but all your future contributions are unlikely to grow either, owing to the outstanding loan that you may have. Contrary to popular belief, 401(k) plans are not cost free even if the interest is paid back to your own 401(k) account.
You cannot control time
Long term investment plans such as 401(k) accounts are based on the idea of working hard in the hope that your money will grow in the long run. Most 401(k)plans double on average in 8 years, therefore, if the loan is used to fund first time purchases such as a first house or car, you will not only lose out on the chance to double your money, buy you will also be left unable to make up for the growth opportunities that you will lose. If you allow your balance to grow, over time, your plan will most likely reach a total that it would have reached as long as you continue to make the necessary contributions regularly.
You will trap yourself
A large number of plans require that the loan is paid immediately if you happen to quit your job. If one is unable to play their loan 60 days after a job loss, the loan becomes fully taxable and may even be subject to a 10% early withdrawal penalty; this can cost you big time, especially if you are unprepared.