To borrow from your 401(k) is heretical, so says conventional financial wisdom. But, few things are black and white. There’s a little gray area where borrowing may be a smart move.
- Down payment: “Tapping your 401(k) plan can be smart if you need the money for a serious purpose, like an expensive emergency like flood damage . . . or a home down payment. But be sure you can pay off the loan,” says Eric Meermann, a certified financial adviser at Palisades Hudson Financial Group in Stamford, Connecticut.
- Onerous debt: “If someone has credit card balances with high interest rates, they can save a lot of money by using a 401(k) loan to pay off the balances,” says Jared Paul, managing director of Capable Wealth, in Queens.
- Budding entrepreneur: Perhaps you can’t get funding for a new venture, or it could be that the funding you’re offered is at a much higher interest rate than you would be charged for your 401(k) loan; if so, borrow from yourself.
- Medical emergency: “If you have a health emergency, no health savings, and a high deductible (or worse, no insurance at all), then you may have no choice,” says Joshua Zimmelman, president of Westwood Tax & Consulting in Rockville Centre.
But don’t make the decision lightly.
Cautions Meermann, “Consider your job security. If you owe money when you leave your job, you will need to repay the balance in full within a short grace period, usually 60 to 90 days. If you fail to repay the loan on time, it’s treated as an early distribution — becoming taxable and subject to a 10 percent early-withdrawal penalty if you are under age 59 ½.”
And try to keep making contributions to your 401(k) even as you pay back the loan; otherwise your retirement savings will take a hit.