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The High Cost of a 401k Loan

When times are tough and money is tight, it may be tempting to dip into your 401k to take out a loan to get you through a rough patch and back on your feet again. Taking out a 401k loan may sound like a viable option; after all, the money is yours, anyway. However, there are several things you may want to consider before taking the loan.

Good Intentions, Slippery Slope

Though you may have every intention of paying the money back into your fund, depending on the circumstances, your loan could very easily turn into a withdrawal. For instance, if you lose your job, you may be required to repay your loan quickly, in which case what you originally intended to be a loan will become a withdrawal. Once your loan becomes a withdrawal, you will have to pay both taxes and penalty fees on the balance you owe. And it doesn’t stop there. Approximately every one thousand dollars withdrawn for people n their 30s will cost around ten thousand dollars in lost future income. For people in their 20s, the number is even more staggering at 20 thousand dollars lost.

Even if your loan does not become a withdrawal, it could stand in the way of future contributions. Whether you voluntarily stop because you can’t afford making contributions while you repay your loan, or whether your plan has prohibited you from making contributions, it will cost you. Once you stop contributing during your loan period, you can lose anywhere from ten to twenty percent of your future retirement. And if you are able to continue making contributions, you will likely be contributing less than if you hadn’t taken the loan.

Take Some Time to Consider Your Options

Before taking out a 401k loan, ask yourself if it is really necessary. Is the loan for an emergency or is it for a vacation or other luxury? Is there a bigger financial problem at hand that you should be focusing on? If so, consider cutting unnecessary expenses before taking out the loan. Can you keep up with your contributions? If not, you may want to reconsider the loan.

If you are struggling financially, a 401k loan is not your only option. The professionals at Advantage CCS can help evaluate your financial situation and offer a variety of options and services to get your finances in order and back on your feet while making sure your financial future remains secure. We can work with your creditors to help you make manageable payments based on your current income and budgeting situation. We can work out a debt management plan and help you learn to stick to a budget. Don't potentially damage your future savings. Contact Advantage CCS first.