Don’t Borrow From Your 401(k)
December 6th, 2006 | Published in 401K | 2 Comments
One of the often quoted “nice things” about a 401(k) is the fact that you can borrow from your 401(k) up to $50,000 or 50% of it’s current assets. What’s nice about that is the fact that while you do pay interest, you’re paying it to yourself so it is in effect an interest free loan, right?
Wrong! What you are borrowing are pre-tax dollars that you contributed through a deduction from your paycheck but what you are paying back with are post-tax dollars plus interest. This money will be taxed once again when you start taking disbursements from your 401(k) during retirement… so the dollars you are paying yourself back with will be taxed twice.
Don’t ever ever ever borrow from your 401(k).
Print This Post
Email This Post
Tags:
Related Posts
December 16th, 2006 at 10:26 pm (#)
I love my dad, but he hasn’t made the best financial decisions during his life. The most recent blunder that he made was exactly what you’re advising against. He used it to pay off his mortgage, so it didn’t go to waste, but it was a poor choice for the reasons you’ve outlined. There was no convincing him (even after the fact) that it was the wrong move, but what can you do? What I’ll do is not make the same mistake he did.
December 18th, 2006 at 12:32 am (#)
You aren’t really being taxed twice on the principal of the loan. You can take money out, put in a bank account, and use that same money to later pay back your loan. This money is not after-tax, it is the same exact money you took out in the first place.
The interest is double-taxed because you do have to use after-tax money to pay that back. However, the original money you withdrew is allowing you to earn interest on some money that would have otherwise gone to the government in the form of income tax payments, so it’s like an interest free loan of “government tax dollars”. The double-taxation on the interest is really paying back the government for the benefit you received from borrowing “their” tax dollars to spend today.