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| Borrowing from
your Retirement Plan: Feeling Loanly? |
| Borrowing money from your defined contribution plan (DC Plan) is a little like eating that third slice of pizza. You might enjoy it now, but you could end up regretting it. |
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| If your plan allows you to borrow money (not all of them do), a DC plan loan is one option if you are in desperate need of cash for an important purchase, such as a house down payment—and you’ve exhausted all other options. Typically, you are allowed to borrow up to half of the vested money in your account, up to $50,000. |
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| When you tap your DC plan for a loan, your payments usually come right out of your paycheck. The interest you pay on that loan (using after-tax dollars) also goes directly into your own account. The interest rate is usually pretty reasonable, often a few percentage points above the prime rate. |
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| While they can be helpful, DC plan loans have two significant shortcomings. First, when you take that chunk of cash out of your account, it stops earning money. Second, you will also miss out on the money your employer matches, if you're now diverting your savings to repaying your loan. In fact, many plans will not allow you to make additional contributions to your account as long as you have a loan against it. You may also have to pay a fee to set up the loan.
One thing to note before taking out a loan against your 401(k)—if you become unemployed, you’ll have to pay the loan back, usually within 90 days. So make sure you’re on rock-solid footing with your job before considering a 401(k) loan. |
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Questions & Answers | |
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| How much does a $10,000 DC plan loan cost in retirement cash if it takes five years to pay off, assuming you subtract your repayments from your normal contribution and retire in 30 years? | |||
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