Borrowing From Your 401(k) Is Possible - But It Might Not Be The Best Idea

Author: Susie Epperson

Borrowing from your 401(k) is possible - but it might not be the best idea

Money gets tight for everyone every now and then - for some, much more so than others. and if this has ever been a situation you've experienced, you know it all too well. Many will look for any source of income just to extricate themselves from particularly sticky financial quandaries.

One of the sources you might consider borrowing from, if it's something you have access to, is your 401(k) account, where you've been building up funds for your retirement. This option is something of a double-edged sword, so to speak.

The reason for that is simple - although you can borrow from your 401(k) account, it does not necessarily mean that you should. Also, it must be stated that not all employers will allow any withdrawals from the account before retirement, but even those who can should proceed with caution.

For the sake of argument, let's say that you are allowed to. Your employer may state that such loans are only permissible under certain dire extenuating circumstances. Whether this is the case or not, withdrawals are generally limited in some way. Usually, this limitation is no more than half of your vested 401(k) account balance, or a total of $50,000, whichever amount is less. Also, when you do borrow, you have to sign a promissory note stating that you'll pay the loan's principal back on time and with interest - typically of 5 or 6 percent.

So as long as you can meet those conditions, funneling a bit from your 401(k) could work for you. But if you're worried it might not, it's probably best to consider other solutions.

Have you ever borrowed - or considered borrowing - from your 401(k)? 

In Brief

  • Money gets tight for everyone every now and then - for some, much more so than others.

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