Avoid borrowing from your 401(k)

7 07 2011

Although interest rates are low when borrowing on your 401(k), it can be an extremely risky move. The biggest risk is that the money you have been diligently saving for your retirement is now at risk.

Another risk is that if you leave your current employer and have not paid back the loan, it will now be classified as a withdrawal instead of a loan. The difference may not seem drastic, but a withdrawal is taxable and on top of that there is a penalty of 1-& if you are under the age of 59 ½.

So in general, it is much better to not borrow against your 401(k) or withdraw early. If money is tight, perhaps consider not investing in the 401(k) for the time being and using that money you would have invested toward your expenses.

According to   an article on CNN Money: “The percentage of workers who said they have less than $10,000 in savings grew to 43% in 2010, from 39% in 2009, according to the Employee Benefit Research Institute’s annual Retirement Confidence Survey. That excludes the value of primary homes and defined-benefit pension plans.”

This statistic proves that the issue of saving is extremely important if you are someone who desires to retire and not have to work for the rest of your life. Borrowing against your 401(k) could severely cripple you in your retirement years, financially speaking.

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