This is a controversial area that many financial advisers debate. Many believe that a withdrawal or loan should be done as a last resort while others believe that if you need the money, it is better to borrow from yourself.
Below is an outline of advantages and drawbacks to borrowing:
One potential advantage of borrowing money from a 401(k) plan is that you may be able to borrow money at a lower interest rate than you could obtain from other sources, such as a bank or credit card company. Additionally, you are borrowing the money from yourself, so there is no credit check required and the process may be quicker and easier than applying for a loan from a financial institution.
However, there are also several potential drawbacks to consider before borrowing from a 401(k) plan.
1) One of the main risks is that if you are unable to repay the loan as agreed, it will be treated as a distribution from the 401k plan, and you will be required to pay taxes on the amount borrowed.
2) If you are under age 59 1/2, you may also be subject to a 10% early withdrawal penalty.
3) If you leave your job for any reason while you have an outstanding 401(k) loan, you will typically be required to repay the loan in full within a short period of time, which could be challenging if you are no longer employed.
Another risk to consider is that by borrowing from your 401(k) plan, you are reducing the balance of your retirement savings and potentially missing out on potential investment gains. This can be particularly detrimental if you are borrowing money early in your career, when you have many years left to save and your money has the potential to grow significantly.
Overall, borrowing from a 401(k) plan can be a useful option in certain circumstances, but it is important to carefully weigh the potential risks and benefits before deciding whether it is the right choice for you.
Ultimately, the answer is really personal and unique to you. Contact a Fee-Only financial adviser who can review your specific situation.
A Fee-Only financial planner can help you determine the best way withdraw money from a 401k plan or borrow from one. They can also help you optimize your 401k plan, review your investment selections and help you achieve your financial goals.
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