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401k Loan

Updated on May 12, 2010

Is 401k Loan Beneficial or Not?

Of course, a cold cash from a 401k loan will be beneficial for you because it can solve any problem you have immediately. But, if you did your own research about making loans from a 401k retirement account, you might have read about many financial experts’ views that it is not the best thing to do because of its negative impact to your financial growth. Regrettably, that is the truth, since loans are considered barriers to your supposed well-off retirement years.

You should keep in mind though, that taking a loan from your 401k account is not unconstructive at all times. There are scenarios when making a loan might be the most purposeful thing to do, but these times should be restricted to circumstances of financial suffering where other alternatives are limited to giving up essential assets such as your house or carrying out early withdrawals from your 401k plan. 

Taking a Loan from your 401k Plan

For understandable reasons, losing important real properties is definitely not a good option to go for and making an untimely distribution from your retirement account is not fine as well because of the 10% penalty fee and other taxes on any money that you take. In this situation, taking a loan from your 401k plan is a functional option because you’ll compensate it back.

The principles that surround a 401k loan can be misleading, that’s why it is most of the time misunderstood. Initially, a loan sounds like a splendid idea, you just have to withdraw your contributed funds from your retirement account and afterwards, you can reimburse it back over a period of time with all the interests going back to you as well. That’s a relief! But if you look at the big picture, it will tell you a different story.

401k Loan Advice

401k loans pros and cons

It’s important that you gain understanding of the two major factors that shove appropriate savings for your retirement years possible. These two chief aspects are: compound interest and time. The more you have “in-hand” of each, the more comfortable your retirement will be. Taking a loan from your retirement savings plan disturbs the supposed harmonious growth of the two major aspects that make a probable well heeled nest egg for you. As a result, though you start making contributions early, you lose time and money.

Another vital factor that you need to look at is the repayment of the loans you’ve taken. As a general rule, all of your contributions to your 401k account are considered as pre-tax money, which means you don’t recompense taxes on the funds you defer. If you come to a decision to take a loan, you withdraw your funds with the assurance that you’ll pay it back, so your withdrawals are also tax free.

The fallback arises when you start to pay off your loan, because you will have to repay the funds using your paycheck with after-tax money. So fundamentally, you’ve now reimbursed taxes on the money that you pay back. There are other concerns that you need to learn about in taking a 401k loan. If you’re about to take a loan for uncalled reasons; think again, it’s not the most beneficial decision to make.

401k Loan Calculator


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