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7 Reasons to Avoid 401(k) Loans

I generally believe that it is NOT a good idea to borrow money from your 401.  In the following article, Roger Wohlner explains why he agrees that it is not good to borrow money from your 401.



One of the features of many 401(k) plans is the ability for participants to take a loan against their balance.

There are rules governing what the loans can be used for, the number of loans that can be outstanding at one time, and the percentage of your account balance that can be borrowed. Additionally there is a time limit by which these loans need to be repaid.

It is the decision of the organization sponsoring the plan whether or not to allow loans and also as to what they can be used for. Typical reasons allowed are for college expenses for your children, medical expenses, the purchase of a home, or to prevent eviction from your home.

The flexibility offered by allowing loans is often touted as one of the good features of the 401(k). However taking a loan from your 401(k) also carries some downsides.

Here are 7 reasons to avoid 401(k) loans.

1. Leaving your job triggers repayment If you leave your job with an outstanding loan against your 401(k) account the balance can become due and payable immediately. This applies whether you leave your job voluntarily or involuntarily via some sort of termination. While your regularly scheduled repayments are deducted from your paycheck, you will need to come up with the funds to repay the loan upon leaving your job or it will become a taxable distribution. Additionally if you are under 59 ½ a 10% penalty might also apply.

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