Many 401(k) plans allow you to borrow $50,000 or up to 50% of funds vested in your account, whichever is less. The interest rate is likely lower than other sources, certainly credit cards.
With interest rates rising the temptation to borrow from your 401k may increase. Hey, it’s your money, why not and pay yourself interest?
- First, you technically are not borrowing from yourself, you are borrowing from the plan trust
- While nearly all plans credit the interest you pay to your account, they don’t have to
- When you withdraw money from your 401k you will pay ordinary income tax on the interest you paid yourself
- While you have the loan you are losing any investment gains if the money was in your account
- Making loan payments may cause you to lower or eliminate your 401k contributions – thus possibly losing an employer match
- If you leave your employer for any reason the loan must be repaid or the outstanding amount will be taxed, probably with a tax penalty. Your employer may require immediate repayment.
- IRS rules allow an extended period to rollover the account with the repaid loan and avoid the immediate tax and penalty. You have until the filing date for the tax year of the distribution.