This story on 401(k) borrowing is sponsored by America First Credit Union – The member-owned, not-for-profit cooperative financial institution is the largest credit union in the state of Utah.
It all seems too perfect. You borrow a chunk of money from your own 401(k) then pay it back to yourself over time. If you lose your job and can’t pay, well then all you’ve done is spend your own money.
Is it really that simple? Thayne Shaffer, Senior Vice President at America First Credit Union talked to KSL News Radio’s Jeff Caplan about the dangers of borrowing against your own 401(k).
401(k) Plans Were Created To Save, Not Borrow
The IRS rules that govern your 401(k) go all the way back to 1978. The plan allows you to defer taxes on a portion of your compensation if you save it for retirement. Because it was designed as a savings tool, using it in another way can end up being expensive.
You Could End Up Paying A Lot In Taxes
If you’re unable to pay back the loan, you will lose the money you borrowed against. But that’s not where the pain ends. You’ll also end up owing federal and state income taxes and probably have to pay an early distribution penalty. You may owe thousands and that bill will probably fall due within about sixty days of you losing your job. Not fun.
But What If It’s For A Good Cause?
There may be some cases where it’s a good idea to borrow from your 401(k). Opinions differ, but some may advise you that it’s okay for certain things like a mortgage down payment or education expenses. Thayne Shaffer, Senior Vice President of America First Credit Union has some advice if that’s what you’re thinking. “Each of those has risks and costs associated with them, and you should weigh all the details and do all the math before you make that decision.”