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What Is A 401k Loan And What Are Its Pros And Cons?
If you contribute to a 401k plan through your employer, it could be one of your most substantial assets besides your home. And if money is tight and your savings account balance is running low, you might think about how you can tap into the funds in your 401k. But you know there must be both pros and cons of doing so.
Borrowing from your 401k is essentially borrowing money from yourself, but there’s much more to it than that. So, before you decide to take out a 401k loan, weigh your options and determine if it’s really worth it.
What is a 401k loan?*
A 401k loan is money you borrow directly from your 401k account balance. You then repay the loan, with interest, directly back to yourself and into your 401k account. Your exact repayment plan is dependent on how much you borrow and your 401k plan’s interest rate.
Note: A 401k loan is different from withdrawing money from your 401k account. When you withdraw money from your 401k account, it is subject to taxation. Also if you are under the age of 59½, you will pay a 10% penalty for early withdrawal (there are a few exceptions related to hardship).
