Are you sure about taking that 401(k) loan?

1. Did you know you pay taxes on the interest twice?

• The interest payments that you make are made with after-tax dollars and you will pay taxes again when you withdraw the money for retirement.
• So, let's say your monthly interest payment is $300 and you're in the 28% tax bracket. You'll have to make $416 in gross earnings to make the $300 payment. Then, when you retire and take withdrawals, you pay taxes again.

• No one can predict that history will repeat itself, but if you miss a few good years in the market, the difference could be difficult to make up. The interest rate on your loan is fixed; the return on your 401(k) investment options could be much higher.
• The money you take out of your account misses out on any potential market gains. Although you are paying interest to off set this, the money comes out of your own pocket.

• Unlike a home equity loan, the interest you pay on your 401(k) loan is not tax deductible.

• If it is not repaid you must pay income taxes and penalties on the outstanding amount of your loan. This can be very difficult if you lose your job, considering this is usually when you need money the most.

• Remember this money is for retirement! Take a loan only as a last resort and be sure you have exhausted all possibilities first.
• If you have no other choice and have to tap into your 401(k), borrow as little as possible and repay the loan as quickly as you can.

Interested in a 401(k) Loan? 

The Real Cost of Borrowing from your 401(k).  More

Expert Articles on 401(k) Loans 

Don’t Tap Your 401(k) to Pay off Debt.  Author:  Brenda Watson.  12/06  Full Story

Don't borrow from 401(k) to pay mortgage.  Author:  Greg Kratz.  12/06 Full Story 

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