It can be tempting to consider borrowing against your 401k account. Over 70% of all 401k plans will let you borrow against your account. Amazingly enough, the laws on the reasons to borrow are lax. Debit consolidation, down payment on a home, medical bills, the sky is almost the limit on how the money is used. Some plans do have limits, so double check with your Benefits administrator. The 401k loan rules are incredibly simple. The most important point to remember is the dollar figure: you are limited to borrowing 50 percent of the account’s value or $50,000, whichever is less.
According to a recent survey, about one-third of people who participate in 401k plans borrow from them. If you are seriously considering a 401k rollover loan , you need to understand the ramifications of the action. You are borrowing against your future for an immediate need. In my book, there is no reason to borrow against your retirement account. Whatever it is that you want to buy now can be saved for.
Know your 401k loan rules before your break your bank!
There are a few bright sides to the 401k loan rules. Borrowers have up to five years to pay the money back. If the loan has been used to purchase a home, the law allows up to 30 years for repayment. Most plans allow for the repayment to be deducted from your paycheck. The real downside to 401k loans comes in two flavors: first, if you leave that job, voluntarily or not, the loan is due within 60 days. Second and more important, your fund is weakened by your action. Many plans do not allow you to contribute to the 401k until the loan is repaid. So you took money that should be growing for your future and you used it for the present and your fund is stalled until you pay it back. That’s like selling gas out of your car to make your car payment and then you can’t drive it.
So while, yes, the law provides for taking a loan against your 401k, there are better ways to get a loan that do not jeopardize your future self. If you need a loan and the credit check is what has you sweating, please see a financial counselor. He or she can help you get on solid footing with money and then credit checks and the like will be no problem.
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