Advantages and disadvantages of taking loan from 401k
Advantages and disadvantages of taking loan from 401k
The money contributed to the plan of 401k is your money and after all you are absolutely entitled to take a loan on it. If you are in need of money and find no other solution except to trap from your retirement plan you have some benefit and also detriment over it. Let us see what is the plus side and negative side of withdrawing loan from this plan.
It is better to think twice before opting to withdraw loan from this plan since it is meant only for your life after retirement. You can get loans sanctioned from this plan easily and you can borrow up to 50% of your investments or to a maximum of $50,000 whichever is lower. But forget not to repay the entire loan in a period of five years. Though it is your own savings, it is mandatory that you should repay it in installments. However the only respite is the interest rates are very less. And whatever interest you pay only gets credited into your account.
On the negative side, the money you withdraw from 401k is fully subjected to tax. In the long run if you continue to withdraw money from your account you will not only have fewer saving but pay more to the federal government in the form of income tax. On one side you are reducing your savings and while on the other you pay more tax. It is better not to prefer to withdraw amount from this plan unless there is absolute emergency and you have no other option left.
Another disadvantage in borrowing money from this savings is in case you are not able to repay the full amount in the stipulated time, then you are liable to pay 10% penalty on the remaining funds. And some companies may not sanction you the loan if you have some outstanding amount to pay on the earlier loan. It is a known fact that borrowing money from 401k carries more disadvantage than advantage. In case you lose your job then you are put to more trouble in repaying the entire amount within 60 days of withdrawal.
Remember all the above factors in mind while you plan to withdraw money from your retirement plan.
