While it may be tempting to borrow from your retirement savings, in the end it may not be the best option. Borrowing from your 401(k) today can impact your future and defeat the overall purpose of saving for retirement. Before you withdraw from your 401(k), consider these three reasons why you should keep your hands off.
- Consider Tax Implications – Participating in a 401(k) lowers your taxable income. When you borrow from your 401(k) you must repay the loan with after-tax dollars. Also, unlike mortgage loan interest, the interest on the 401(k) loan is not tax deductible.
- Loss Of Opportunity – Borrowing from your 401(k) means you lose out on potential growth since it’s not invested in the market. You’re missing out on compounding earnings and tax-deferred growth. This loss of time can never be recovered. Also, some plans require you to pay back the loan before you’re able to contribute to your plan.
- If You Leave Your Job – If you are no longer working for your employer, you must repay your loan within 60 days. The amount of loan that is not paid back is considered a distribution and is subject to income tax and 10% early withdrawal penalty (if under the age of 59 ½).
Tapping into your retirement savings has its consequences. Before you borrow against your 401(k) it’s important to explore all other options and consult with your financial advisor first.
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