According to the Wall Street Journal, the number of Americans taking loans against their 401(k) plans is increasing because most plans allow participants to borrow funds to purchase a home or to avoid foreclosure.
But just because the avenue is there, though, doesn’t mean that borrowing from a 401(k) is a good idea.
Here’s why: When you put money into a 401(k) plan, you use pre-tax dollars but when you repay a 401(k) loan, you use post-tax dollars.
Therefore, if your tax rate is 28%, it takes $1,388 of income to repay each $1,000 increment of your loan. Then, when you withdraw the funds at retirement, the money is taxed again.
Double-taxation is costly, but the other less-well-known impact of a 401(k) loan is that you can lose the long-term power of compounded interest on your entire portfolio.
This isn’t to say that a 401(k) loan is bad, it just may not be right for you. So, if you’re planning to withdraw from your 401(k), be sure to talk with a qualified financial professional first.
If you’d like a referral to a trusted professional, call or email me anytime.