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Q:
What are the down sides to borrowing from my 401k?

My wife and I have just under $30,000 of unplanned debt on four credit cards. We have no other debts, and our combined gross income is about $80,000. I can take a loan from my retirement plan at work in which I have over $100,000 invested. A loan of about $30,000 is to be repaid to myself, pre-tax, and the interest also goes back into my own account. What are the bad points to this plan? If my employment with the company terminates, will I need to pay back the loan all at once? Thanks! -Doug

Doug,

Your solution sounds simple and it just might work. However, I’d like to play devil’s advocate for a minute to make sure you’re considering all angles. Ask yourself:

  • If I’m having trouble making the debt payments, how will I repay my retirement fund?
  • Am I aware of the penalties for not repaying the retirement fund?
  • Because gains in the market cannot be timed, am I willing to lose some important investing opportunities?
  • What got me into this situation in the first place and what can I do to make sure it never happens again?

You should also know that you must repay the loan with after-tax dollars and the interest is not tax-deductible. Also, if you leave the employer for any reason, you may be subject to early withdrawal penalties that are very steep. Ask your human resources department for more information. If after considering all angles you still feel like borrowing from your retirement is a good solution for you, then I’d say it is. 

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