Don't Gamble Your Retirement with a 401k Loan

If you take out a 401k loan, you will be gambling with your retirement savings. And as you know, this is not a good idea. The more you gamble with this money, the better the chance there is that you are going to end up disappointed.

Job Loss

If you take out a 401k loan and then lose your job, you may be expected to pay back the money immediately. This is not always the easiest thing to do, now that you are unemployed. If you do not pay back the money, it may be seen as an early withdrawal. In turn, you are going to face penalties as well as a huge change to your tax situation.

Loss of Interest

One of the main benefits of a 401k is that you are able to earn interest on your money. As the years go by, your money grows thanks to the interest you earn as well as regular contributions. If you take out money, in the form of a loan, you are losing out on the ability to earn as much interest as possible.  

Lose Tax Benefits

After you take out a 401k loan, the money is no longer sheltered from taxes. Whether you pay it back from your bank account or from future earnings, the payments are made with after-tax dollars. In other words, when you finally get around to paying the loan back, you are actually going to end up parting with more money. On top of this, when you retire, the money that you put back into your account is taxed once again upon withdrawal.

Premature Distribution

What if I take a 401k loan and do not end up paying it back? In this case, it is seen by the IRS as a premature distribution. In simple terms, this means that you will owe federal and state income tax on the money–if you are under the age of 59 ½. On top of this, there is a 10 percent penalty. In the end, this means that you are not getting nearly as much out of your 401k as you initially thought.

No Tax Benefits

While some loans, such as a mortgage, offer tax benefits, this is not the case with a 401k loan. It is a consumer loan, and for this reason, you will not reap any tax benefits in the end.

Leads to Smaller Contributions

Since you now have a loan, there is a good chance that you will lower future 401k contributions so that you have enough money to pay it back. In the long run, this means that you are putting less into your 401k and subsequently earning less in interest.  

Once you agree to the terms of a 401k loan and borrow the money, there is no looking back. Consider the potential downfalls of this type of loan before you decide to gamble with your retirement.  

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