Taking a 401(k) loan means borrowing moneyꦉ from your retirement savings account. Yoಞu can usually borrow up to $50,000, which must be repaid.

The obvious downside is depleting the money you are saving and investing for your future. But, when a 401(k) loan is taken and repaid in the right way, your retirement savings should not be negatively impacted. This is in contrast to a withdrawal. When you withdraw funds from your 401(k), they're gone forever. With a loan, however, you get the money back.

Learn when you might want to borrow money from your 401(k), plus 澳洲幸运5官方开奖结果体彩网:the rules and regulations to keep in mind.

401(k) Loan Basics

Technically, 401(k) loans are not true loans, because they do not require a credit check or a lender's evaluation of your 澳洲幸运5官方开奖结果体彩网:credit history. They are more accurately described as the ability to access a portion of your own retirement plan money. The loan amount you can borrow tax-free from your 401(k) depends on your vested balance. You can b🥃orrow whic🥃hever is less of:

1. The greater of $10,000 or 50% of your vested account balance; or
2. $50,000

You then must repay the money you have accessed under rules designed to restore your 401(k) plan to approximately its original state as if the transaction had not occurred.

For a 401(k) loan, any interest charged on the outstanding loan balance is repaid by the participant into the participant's own 401(k) account; technically, this is a transfer from one of your pockets to another, not a borrowing expense or loss. As such, the 澳洲幸运5官方开奖结果体彩网:cost of a 401(k) loan on your retirement savings progress can be minimal, neutral, or even positive. In most cases, it will be less than the cost of the interest you pay on a 澳洲幸运5官方开奖结果体彩网:bank or consumer loan.

When To Use a 401(k) Loan

When you must find the cash for a serious short-term liquidity need, a loan from your 401(k) plan probably is one of the first places you should 🅠look.

"Let’s face it, in the real world, sometimes people need money," said , MBA, CFP, author of "Financial Advice for Blue Collar America" and a financial planner with Wilson David Investment Advisors. "Borrowing from your 401(k) can be financially smarter than taking out a cripplingly high-interest 澳洲幸运5官方开奖结果体彩网:title loan, pawn, or 澳洲幸运5官方开奖结果体彩网:payday loan—or even a more reasonable personal loan. It wil🃏l cost you less in the ꧅long run."

Why is your 401(k) an attractive source for short-term loans? Because it can be the quickest, simplest, lowest-cost way to get the cash you need. Receiving a loan from your 401(k) is not a 澳洲幸运5官方开奖结果体彩网:taxable event unless the loan limits and repayment rules are violated, and it has no impact on your 澳洲幸运5官方开奖结果体彩网:credit rating.

Assuming you pay back a sho🍃rt-term loan on schedule, it usually will have little effect on your retirement savings progress.

Of coওurse, there are also ways to prevent needing a 401(k) loan at all.

"While one's circumstances in taking a 401(k) loan may vary, a way t💝o avoid the downsides of taking one in the first place is preemptive," said , vice president of wealth management at Trilogy Financial. "If you are able to take the time to preplan, set financial goals for yourself, and commit to saving some of your money both often and early, you may find that you have the funds available to you in an account other than your 401(k), thereby preventing the need to take a 401(k) loan."

Consider all of the ways you could borrow money and compare it to a 401(k) loan. (You could tap your home equity with a 澳洲幸运5官方开奖结果体彩网:Home Equity Line of Credit (HELOC), for example.) Then think about the top reasons to borrow in the first place before making your final decision.

Top 4 Reasons To Borrow from Your 401(k)

1. Speed and Convenience

In most 401(k) plans, requesting a loan is quick and easy, requiring no lengthy applications or credit checks. Normally, it does 澳洲幸运5官方开奖结果体彩网:not generate a credit inquiry or affect your credit score.

Many 401(k)s allow loan requests to be made with a few clicks on a website, and you can have funds in your hand in a few days, with total privacy. One innovation now being adopted by some plans is a 澳洲幸运5官方开奖结果体彩网:debit card, through which multiple loans can be made instantly in small amounts.

2. Repayment Flexibility 

Although regulations specify a five-year 澳洲幸运5官方开奖结果体彩网:amortizing repayment schedule, for most 401(k) loans, you can repay the plan loan faster with no 澳洲幸运5官方开奖结果体彩网:prepayment penalty. Most plans allow loan repayment to be made conveniently through 澳洲幸运5官方开奖结果体彩网:payroll deductions—using after-tax dollars, though, not the pretax ones funding your plan. Your plan statements show credits to your l🐷oan account and your remaining principal balance, just like a regular bank loan statement.

3. Cost Advantage 

There is no cost (other than perhaps a modest 🔥澳洲幸运5官方开奖结果体彩网:loan origination or administration fee) to tap your own 401(k) money for short-term liquidit🎐y needs. Here's how it usually works:

You specify the investment account(s) from which you want to borrow money, and tho𒉰se investments are liquidated for the duration of the loan. Therefore, you lose any positive earnings that would have been produced by those investments for a short period. And if the market is down, you are selling these investments at a cheaper price than at other times. The upside is that you also avoid any further investment losses on this money.

The cost advantage of a 401(k) loan is the equivalent of the 澳洲幸运5官方开奖结果体彩网:interest rate charged on a comparable 🌼consumer loan minus any lost investment earnings on the principal you borrowe💎d. Here is a simple formula:

Cost Advantage = Cost of Consumer Loan Interest - Lost Investment Earnings

Let's say you take out a bank personal loan or take a cash advance from a credit card at an 8% interest rate. Your 401(k) portfolio is generating a 5% return. Your cost advantage for borrowing from the 401(k) plan would be 3% (8 - 5 = 3).

Whenever you can estimate that the cost advantage will be positive, a plan loan can be attractive. Keep in mind that this calculation ignores any tax impact, which can increase the plan loan's advantage because consumer loan interest is repaid with after-tax dollars.

4. Retirement Savings Can Benefit 

As you make loan repayments to your 401(k) account, they usually are allocated back into your portfolio's investments. You will repay the account a bit more than you borrowed from it, and the difference is called "interest." The loan produces no (that is to say, neutral) impact on your retirement if any lost investment earnings match the "interest" paid in—earnings opportunities are offset dollar-for-dollar by interest payments.

If the interest paid exce🅠eds any lost investment earnings, taking a 401(k) loan can actually increase your retirement savings progress. Keep in mind, however, that this will proportionally reduce your personal (non-retirement) s♔avings.

401(k) Loans and Their Impact on Your Portfolio

One argument against taking a 401(k) loan is that withdrawing funds can 澳洲幸运5ღ官方开奖结果体彩网:impede the performance of your p🐭ortfolio and the building up of your retirement nest egg. That's not necessarily true. First of all, as noted above, you do repay the funds, and you start doing so fairly soon. Given the long-term horizon of most 401(k)s, it's a pretty smalꦡl (and financially irrelevant) interval.

The other problem with the bad-impact-on-investments reasoning is that it tends to assume the same 澳洲幸运5官方开奖结果体彩网:rate of return over the years; however, the stock market doesn't work like that. A growth-oriented portfolio that's weighted toward equities will have ups and downs, especially in the🍎 short term.🔴

If your 401(k) is invested in stocks, the real impact of short-term loans on your retirement progress will depend on the current market environment. The impact should be modestly negative in strong up markets, an𓄧d it can be neutral, or even positive, in sideways or down markets.

The grim but good news is that the best time to take a loan is when you feel the stock market is vulnerable or weakening, such as during 澳洲幸运5官方开奖结果体彩网:recessions. Coinci꧋dentally, many people find that they need fun𓄧ds to stay liquid during such periods.

Potential Downsides to 401(k) Loans

Two other common arguments against 401(k) loans are that they are not 澳洲幸运5官方开奖结果体彩网:tax-efficient and that they create enormous headaches when participants can't pay them off before leaving work or retiring. Let's examine when these factors could create financial problems for borrowers and how they can be avoiꦆded.

Tax Inefficiency 

The claim is that 401(k) loans are tax-inefficient because they must be repaid with after-tax dollars, subjecting loan repayment to 澳洲幸运5官方开奖结果体彩网:double taxation. Only the interest portion of the repayment is subject to such treatment. The cost of double taxation on loan int🌜erest is often fairly small, compared with the cost of alternative ways to tap short-term liquidity.

Here is a hypothetical situation that is too often very real: Suppose Jane makes steady retirement savings progress by deferring 7% of her salary into her 401(k). However, she will soon need to tap $10,000 to meet a college tuition bill. She anticipates that she can repay this money from her salary in about a year. She is in a 20% combined federal and state 澳洲幸运5官方开奖结果体彩网:tax bracket. Here are three ways she can tap the cash:

• Borrow from her 401(k) at an "interest rate" of 4%. Her cost of double-taxation on the interest is $80 ($10,000 loan x 4% interest x 20% tax rate).
• Borrow from the bank at a 澳洲幸运5官方开奖结果体彩网:real interest rate of 8%. Her interest cost will be $800.
• Stop making 澳洲幸运5官方开奖结果体彩网:401(k) plan deferrals for a year and use this money to 澳洲幸运5官方开奖结果体彩网:pay her college tuition. In this case, she will lose real retirement savings progress, pay higher current income tax, and potentially lose any 澳洲幸运5官方开奖结果体彩网:employer-matching contributions. The cost could easily be $1,000 or more.

Double taxation of 401(k) loan interest becomes a meaningful cost only when large amounts are borrowed and then repaid over multi-year periods. Even then, it usually has a lower cost than alternative means of ac🍨cessing similar amounts of cash through bank/consumer loans or a hiatus in plan deferrals.

Slower Account Growth

Although a 401(k) loan may be cheaper than other loan options, there are still opportunity costs associated wit𒉰h this type of loan. During the life of the loan, y𒁃ou will be missing out on the potential growth of those funds.

In addition, some 401(k) plans have provisions prohibiting contributions to your account until you repay the loan balance. If you🦩r employer match🐻es contributions, you will also be missing out on that match.

Leaving Work With an Unpaid Loan 

Suppose you take a plan loan and then lose your job. You will have to repay the loan in full. If you don't, the full unpaid loan balance will be considered a taxable 澳洲幸运5官方开奖结果体彩网:distribution, and you could also face a 澳洲幸运5官方开奖结果体彩网:10% federal tax penalty on the unpaid balance if you are under age 59½. While this scenario is an accurate description of🔯 tax law, it doesn't always reflect reality.

Some people, especially⛦ those who are cash-strapped, choose to take part of their 401(k) money as a taxable distribution at separation from employment. Having an unpaid loan balance has similar tax consequences.

People who want to avoid negative tax consequences can tap other sources to repay their 401(k) loans before taking a distribution. If they do so, the full plan balance can qualify for a 澳洲幸运5官方开奖结果体彩网:tax-advantaged transfer or rollover. If an unpaid loan balance is included in the participant's 澳洲幸运5官方开奖结果体彩网:taxable income and the loan is subsequently repaid, the 10% penalty does not apply.

The more serious problem is to take 401(k) loans while working without having the intent or ability to repay them on schedule. In this case, the unpaid loan balance is treated similarly to a 澳洲幸运5官方开奖结果体彩网:hardship withdrawal, with negative tax consequences and perhaps also an unfavorable impact on plan participation rights.

401(k) Loans To Purchase a Home

Regulations require 401(k) plan loans to be repaid on an amortizing basis, meaning with a fixed repayment schedule in regular installments. However, longer payback periods are allowed for 401(k) loans used to purchase a 澳洲幸运5官方开奖结果体彩网:primary residence. The IRS doesn't specify how long, though, so it's something to work out with your plan administrator.

Borrowing from a 401(k) to completely 澳洲幸运5官方开奖结果体彩网:finance a residential purchase may not be as attractive as taking out a 澳洲幸运5官方开奖结果体彩网:mortgage loan. Plan loans do not offer 澳洲幸运5官方开奖结果体彩网:tax deductions for interest payments, as do most types of mortgages. And, ♈while withdrawing and repaying within five years can have minimal impact on your retirement savings, the impact of a loan that has to be paid back over many years can be significant.

However, a 401(k) loan can provide immediate funds to cover the down payment or 澳洲幸运5官方开奖结果体彩网:closing costs for a home. It won't affect your ability to qualify for a mortgage, either. Since the 401(k) loan isn't technically a debt—you're withdrawing your own money, after all—it doesn't impact your 澳洲幸运5官方开奖结果体彩网:debt-to-income ratio or your credit score⭕, tw🤪o big factors that influence lenders.

If you do need a sizable sum to purchase a house and want to use 401(k) funds, you might consider a hardship withdrawal instead of, or in addition to, the loan. But you will owe 澳洲幸运5官方开奖结果体彩网:income tax on the withdrawal and if the amount is more than $10,000, a 10% penalty as well.

Frequently Asked Questions (FAQs)

The Bottom Line

Arguments that 401(k) loans are bad for retirement accounts often assume constantly strong stock market returns in the 401(k) portfolio, and they fail to consider the 澳洲幸运5官方开奖结果体彩网:interest cost of borrowing similar amounts via a bank or other consumer loans (such as racki🐷ng up credit card balances).

Don't be scared away from a valuable liquidity option embedded in your 401(k) plan. When you lend yourself appropriate amounts of money for the right short-term reasons, these transactions can be the simplest, most convenient, and lowest-cost source of cash available. Before taking any loan, you should always have a clear plan in mind for repaying these amounts on schedule or earlier.