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Should You Borrow from Your 401k

Maybe your credit is not the best right now, and you can’t qualify for a loan or a credit card that doesn’t cost you an arm and a leg, but, you need some cash – perhaps to consolidate some debt, or to cover an emergency expense. If you have a 401k plan, you may be able to become a lender and borrower, but you should proceed with caution.

The first thing is to check with your employer to see if your 401k plan does allow for loans. If it does, you may borrow up to the limit allowed by the plan. You will then pay interest, to yourself (back into your account). The interest varies from plan to plan, but they are typically very low. You will need to be able to fully repay the loan within five years, or your loan will turn into a taxable withdrawal which will also be subject to penalties. Also, unless you feel pretty secure in your employment, you may want to avoid borrowing from your 401k because your loan could be callable within 60 days should you leave your employer for any reason.

Borrowing from your 401k should not be considered lightly. You will be interrupting the long term growth on your retirement funds. But, if you’re responsible enough, it can be a more preferable short term solution than borrowing at rates that are double or triple.

The information provided is not intended to be legal, tax, or financial advice or recommendations for any specific individual, business, or circumstance. TowneBank cannot guarantee that it is accurate, up to date, or appropriate for your situation. Financial calculators are provided for illustrative purposes only. You are encouraged to consult with a qualified attorney or financial advisor to understand how the law applies to your particular circumstances or for financial information specific to your personal or business situation.