The Dangers of 401(k) Loans

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By Mandi Woodruff

Dipping into your 401(k) plan is tantamount to journeying into the future, mugging your 65-year-old self, and then booking it back to present day life.

And still, it turns out one in four workers resorts to taking out 401(k) loans each year, according to a new report by HelloWallet -- to the tune of $70 billion, nationally.

To put that in perspective, consider how much workers contribute to retirement plans on average: $175 billion per year. That means people put money in only take out nearly half that contribution later.

There's no question the recession dealt American households a heavy blow, and most workers say they dipped into retirement savings to cover costs like college tuition (constantly rising), their mortgages, credit card debt, and other emergency expenses.

Between 2004 and 2010, early withdrawals doubled from $30 billion to $60 billion, according to the report.

But at what cost?

"You might be cheating your future self," says Catherine Golladay, VP of 401(k) Participant Services at Charles Schwab. "While paying back a 401(k) loan, many people stop saving in their 401(k) plan, which can really derail retirement savings."

And don't forget about the fees. Workers under age 59½ who dip into retirement funds must generally pay back their loan quickly, between 30 to 90 days in most cases. Otherwise, you could wind up paying income taxes on whatever you've taken out, along with a 10 percent early withdrawal penalty.

"Even though you're borrowing from yourself, you still have to pay back the loan with interest -- and with after-tax money, which then gets taxed again when you withdraw it at retirement," Golladay notes.

It's also worth noting that the groups most likely to borrow from their retirement accounts are low-income, middle-aged, and minority workers -- arguably the people who can least afford it.





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66 Comments

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Janet

hi janet, love bev

July 25 2013 at 7:32 PM Report abuse rate up rate down Reply
twosteppinboop

IF I STARTED A JJOB TODAY I WOULD NEVER JOIN A 401K.IHAVE LOST TO MUCH IN THE 401K THEY KEEP TAKING OUT I WONT HAVE NOTHING TO LVE ON KEEP THEBECAUE MONEY AND SAVE ON YOUR OWN. THE GOVERNMENT KEEPS TAKING FROM US .THEY CANT STOP SPENDING.

January 25 2013 at 8:27 PM Report abuse rate up rate down Reply
1 reply to twosteppinboop's comment
Janet

your stupid, spare us

July 25 2013 at 7:34 PM Report abuse rate up rate down Reply
raymondw1

I've borrowed against my 401K and paid it back with no penalties. I keep hearing how borrowing against your account can be catastrophic then the articles always start in on the penalties you pay for early withdrawal. A loan is not a withdrawal. I had to pay interest on the money I borrowed but it was at a lower rate than borrowing against a credit card or taking out an unsecured loan at a bank. And the interest I paid went back into my account, not to some credit card company. AND, at the time, my 401K was performing so poorly that my payments made my loan the best investment I had (8% vs. -5% to 5%).

January 24 2013 at 6:13 PM Report abuse rate up rate down Reply
klirich

We did take out loans againt our 401's a couple of years but I don't know if the article contributor is plain out wrong or our plans are favorable; we have been paying back on the loans for over a year now with NO early withdrawal or tax penalties. I believe as long as you make the payments, you are not penalized. And DUH. We know it's something we shouldn't do braniac! Nobody does it unless its a last resort. The alternative is defaulting on all your obligations...which the way things are going, may be a possibility very soon in our situation. BTW, we have not suspensed our contributions so besides loan payments, we're still contributing.

January 24 2013 at 12:23 PM Report abuse rate up rate down Reply
TAMMY

THE GOVERNMENT IS TAKING EVERYTHING FROM US, I SEE IT THAT RETIREMENT IS OUR MONEY AND WE SHOULD DO WHAT WE WANT WITH IT , NOT HAVEING TO PAY ANY TAXES OR PENALTIES! NOW THE GOVERMENT IS TAKEING AWAY OUR GUN RIGHTS, WHATS NEXT? THE PREZ AND THE GOVERMENT STINK!

January 24 2013 at 12:14 PM Report abuse rate up rate down Reply
1 reply to TAMMY's comment
Janet

if your gun rights are taken away its cause you are a convictied felon. no one elses rights have been taken away. I imagine your age to be ........to young for an educated... good luck in your life, you'll need it.

July 25 2013 at 7:42 PM Report abuse rate up rate down Reply
nflamingo

We lost a very large amout in our 401, just before my husband was forced into retirement......DON'T rely on it for retirement.
Unless your company has a pension plan you may screwed, in retirement.

January 24 2013 at 11:02 AM Report abuse rate up rate down Reply
JOSEPH

Some of this information is incorrect. Many 401k loans allow you to borrow on an extended payback arrrangement of up to 5 years. You are actually paying the interest rate back to yourself. With the market producing little to no yield for mosts 401k's, that interest could actually turn out to be beneficial. You really have to investigate your 401k for the details. This article only skims the surface.

January 24 2013 at 10:57 AM Report abuse rate up rate down Reply
papawot

There have been many articles about not borrowing from your 401K and frankly I don't understand it. In the article it states that many people suspend contributions to their 401K while paying back a loan. If this is the case one should not borrow. Actually if you borrow from your 401K you are paying the loan and interest back to yourself like any other investment. Admittedly it may not be the best investment but as compared to other types of loans it may be fine. One should not borrow for frivilous purposes but I don't see the problem otherwise. Actually it may be beneficial to remove money during a time when your investments are up and paying it back when the market is down, headed back up. For some reason these issues are never discussed in the articles I see, so explore them with a financial advisor.

January 24 2013 at 10:13 AM Report abuse rate up rate down Reply
jjones5139

Just what the gov't wants to control us, why they want our guns

January 24 2013 at 9:48 AM Report abuse rate up rate down Reply
1 reply to jjones5139's comment
JE WA ZA WI

What does owning a gun have to do with retirement,or you want everyone to know you lost in the election ?

January 24 2013 at 11:00 AM Report abuse rate up rate down Reply
Rich

Game over, the middle class has lost the war

January 24 2013 at 9:38 AM Report abuse rate up rate down Reply