The lure of free money is often too big to overcome. Sometimes it’s right to grab it. Other times it can hurt you. Can you tell the difference?
Is it better to borrow or withdraw from your 401?
Remember, the answer to this question begins with your plan document. You’ll need to see what kinds of provisions it makes regarding distributions. “401 loans are becoming increasingly popular, but there are some risks to consider before taking one out,” says Inez Stanway, Owner of Live Laugh Create in Atlanta. “A 401 loan is a loan that is taken out against the balance of your 401 account. The money can be used for any purpose, and the loan must be repaid within five years with interest. On the surface, taking out a 401 loan may seem like a good idea.
Second, don’t forget the taxes, whether you pay them today or in the future , they’ll be taxed again). “If you leave that employer or worse, get laid off, your 401 loan may become due within as short as 90 days,” says Escamilla. “And if you do not have the cash to pay it back, not only does it become a taxable distribution, but also the 10% early distribution penalty may apply . This means you could be on the hook for 40% or more in taxes and penalties, depending on your tax profile.”
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