I had a question posed to me this week about 401k loans, and whether they were a good idea. If you have a 401k, borrowing from it may seem like an easy way to pay off your other debts.
Interest on the loan is not tax deductible, even if you borrow to purchase your primary home. If I want to borrow for a down payment on the purchase of my primary residence, do I have to pay the loan back in five years like a normal 401k loan?
No, most plans allow longer pay back terms when the loan is going to be used to purchase a primary residence. Typically, if you quit working or change employers, it is not uncommon for plans to require full repayment of a loan within 60 days of termination of employment. Loans from your 401k are not reported to the credit-reporting agencies, but if you are applying for a mortgage, lenders will ask you if you have such loans and they will count the loan as debt.
If you default on a 401k loan, the default will not be reported to the credit-reporting agencies and it will not negatively impact your credit rating. Once the loan has been made, your payments will be deducted from your pay each month and you generally can't stop this process.
If I default on my loan, how will I know the amount I must report as income on my federal tax return? Talk to your plan administrator or ask them for a copy of your plans Summary Plan Description (also known as an SPD). The Hidden Downsides of a 401k Loan - Abstract: At first, the 401k loan looked like a great option.
The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. This work is licensed under a Creative Commons Attribution-NoDerivatives 4.0 International License. Because you now have a loan payment, you may be tempted to reduce the amount you are contributing to the plan and thus reduce your long-term retirement account balance.


Plan loans are one way to ensure access, but, as the author notes, there are several pitfalls related to these 401k plan loans that participants should be aware of.
Weigh Your Options Before Borrowing - Abstract: Nearly one million 401k investors initiated a loan from their account during the past year. There's no credit check, the fees and interest rate are minimal, and best of all, the interest would go back into her own account.
Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan. General Accounting Office, the interest rate paid on a plan loan is often less than the rate the plan funds would have otherwise earned.
It's not uncommon for plans to require full repayment of a loan within 60 days of termination of employment. To help pay back these loans, many investors reduce or stop saving in their 401k altogether. However, there are also several hidden downsides of 401k loans to be aware of that are outlined here. If you can't repay the loan, it is considered defaulted, and you will be taxed on the outstanding balance, including an early withdrawal penalty if you are not at least age 59 ½. This 20-page paper from the Journal of Pension Planning & Compliance the complexity of properly administering plan loans.
But there can be long-term consequences for investors who stop saving, including the potential loss of up to hundreds of dollars in monthly retirement income. If they had the cash to pay off their bank right now, they would absolutely do it without hesitation. Jim are in their mid-50’s with about 10 more years of work ahead of them before they retire. They have a 401a account (which is very similar to a 401k) that’s beefed up with $950,000, but still have $47,000 of debt to pay on their mortgage. Jim for even thinking about what might be wise for them in the present and in their future.


Many people just go through life accumulating stuff and never even think twice about how it could impact them or their future retirement. I understand the fears and concerns of a house mortgage and the state of the economy, but are these fears leading Jim and Mrs. Jim to a positive response or a crippling reaction?The Pros and Cons of Paying off the Mortgage with Your 401kMany people consider withdrawing money from their 401k and just elect to pay the penalty. Is this a wise idea for paying off debts and putting yourself into a better financial position? Jim are sick and tired of the market rising and falling, and they just wish that their mortgage was completely paid off. While it is difficult to put a quantitative measure on emotion, I totally get where they are coming from! After all, I am currently in a fierce battle with my mortgage and am trying to pay it off as soon as possible. The feeling that I will get once that mortgage is paid off will be priceless, and I absolutely can’t wait to accomplish it!The big looming question at this point however, is whether or not Jim and Mrs. Jim should borrow money against their 401k to pay off that remaining mortgage balance of $47,000.So what do you think? Third, if I have a heart attack, I may be dead in which case she gets the life insurance policy.
Emotions can be very powerful, and if getting rid of that mortgage outweighs the other points given here by the other readers, then you know what you should do.
Worse yet, you will be paying tax again on those loan payments when you withdraw those dollars in retirement.



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