November 23, 2016
Should You Ever Borrow From Your 401(k)?
Financial experts agree you should tuck money away for retirement and give it as much time as possible to grow without touching it, but knowing you have a lump sum of cash somewhere can be an attractive option to those who find themselves in a financial bind. Should you ever borrow from your 401(k)? Is tapping into your account and taking a loan ever considered a smart thing to do?
According to a 2014 study from TIAA called Borrowing Against Your Future, one in three Americans who participate in a retirement plan have taken a loan out from that savings. Digging a little deeper, more than 40% of those borrowers have taken out two or more loans. So regardless of the advice of financial experts, 30% of Americans are still raiding their retirement accounts when they are short on cash.
Borrow To Pay or Avoid Debt? YES & NO
Forty-six percent of those who borrowed from their 401(k) plans used the money to pay off debt. This can be a smart move considering the interest rate on a 401(k) loan is often much lower than a new credit card or car loan. However, the trick to not hurting your future is to keep making your regular contributions to your 401(k) while paying off the loan. If you can’t commit to both, then borrowing from your 401(k) to pay or avoid debt is probably something you shouldn’t do.
Borrow for Emergencies? NO
Another 35% used their 401(k) loan to pay for emergency expenses. Yet another reminder of why setting up an emergency fund is so important. Too many Americans are under saving and more are now using their 401(k)’s to pull double duty–as a retirement account and an emergency fund. This is not the best use of these funds and you should really move toward setting up an adequate account for all your liquid emergency fund needs.
Borrow to Invest? YES
Is it smart to use your 401(k) to purchase a home? Or start a business? These seem to be two of the most acceptable reasons to financial experts for borrowing from your 401(k), depending on your overall financial situation. It can be a smart move since the repayment period is eligible to be stretched out for up to five years, payments are automatically deducted, and the interest rate is typically low.
Other things to consider
You also don’t have to qualify for a 401(k) loan, so if your plan allows loans and you have the funds available you can borrow from it without hurting your credit score. A 401(k) loan can be one of the quickest, simplest, low-cost ways to get cash you need in hand. Lastly, if you pay back your loan on schedule and continue to make regular payroll contributions to your 401(k), you will typically see little to no impact on your retirement savings goals.
Unfamiliar with how 401(k) loans work, read more about it here. Borrowing From Your Retirement Plan.