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Tapping into your retirement savings could leave you worse off.
Well, now I know how to get your attention. In an article entitled "Avoid these 401(k) Mistakes," I wrote that it is always a bad idea to borrow from your 401(k). Judging by the flood of e-mail I received in response, a lot of folks disagree. Most readers offered some interesting insights, but I still think borrowing from your 401(k) is something you should avoid. Why do I think so? Let's first take a look at how 401(k) loans work, their potential advantages, and why they're unwise.
The Basics
Whether you can take a loan your 401(k) depends on whether your employer has decided to give you the option. If borrowing is an option, you'll usually be allowed to borrow up to 50% of your account balance, up to $50,000. You'll have to pay interest on your loan, typically a percentage point or two above the prime rate, and generally speaking, you'll have five years to pay it back. (If you've taken a loan to buy a house, you'll probably have 10 years.) You start repaying right away, with equal payments over the term of your loan that are taken directly out of your paycheck.
The Case for Borrowing from Your 401(k)
So you've got a financial emergency on your hands, and you need some quick cash. A 401(k) loan looks like a better option than the alternatives. Sure, you've got to pay interest on your 401(k) loan, but it's |
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