Retirement Archives

The Dangers Of 401k Loans And Your Retirement

If you are in a financial bind, seeing the money sitting in your 401k retirement account can be tempting. It is a tempting source that you may consider tapping in order to help alleviate some of your financial problems. However, your 401k retirement plan is there to be your safety net in retirement. Your 401k is not designed to be your emergency fund now. It may seem like it is not a big deal because you are essentially borrowing the money from yourself with interest, but it does not really work that way. There are dangers of 401k loans. Here are some dangers of why you should avoid taking a loan from your 401k retirement plan.

You Must Repay Your 401k Loan

When you take out a 401k loan from your retirement plan, you must repay it. Defaulting on the loan can have serious tax consequences that can erode all of your hard work that took years to build up. Your employer is required to treat your 401k loan like any other loan or financial agreement. You must set up a repayment plan that starts immediately after taking the loan. Many 401k retirement plans now prevent future contributions to the 401k until the loan is repaid. This prevents you from continuing to grow your money and can serious degrade your future earnings that you will not be earning on the money you borrowed and on any contributions you are not allowed to make while you repay the loan. If you are lucky, you will still be allowed to contribute money to your 401k plan while repaying the loan. Or, you could consider forgoing contributions in favor of early loan repayment.

How Debt Can Ruin Your Retirement

by Guest Contributor

This is a guest post by Mike Egan who is the author of “Your Stronger Financial Future”.

A recent article in the New York Times focuses on seniors who are considering mortgages on new homes when they retire. The article is a good summary of what seniors (or anyone considering a mortgage application) should expect and the specific items to have handy, such as proof of income and a good credit score.

What the article doesn’t address is the question of whether a mortgage is a good idea, either for a senior (65 and older) or anyone else. Think about this – no matter what the term of the home loan, or mortgage, you’ll be paying interest to the lender, plus repaying the principal (the $$ you borrowed) for some period of time. Home mortgages and student loans are the two main examples of what I call “good debt” – which are loans that result in you owning something of value at the end. So, given that a mortgage generally results in you owning the house or condo when you’ve paid back the loan, let’s examine the math involved in a home mortgage.

Your 401k Retirement Plan Is Not An Emergency Fund

by Hank Coleman

Recently, one of my coworkers asked my opinion about taking out a 401k loan to help replace a blown engine in his wife’s car. This is a horrible idea. Your retirement plan is not an emergency fund.

Car troubles, uninsured medical expenses, house renovations, and other everyday items are not great uses for money that you have invested in your retirement fund. You should not use your 401k as an emergency fund.

It was not designed for that, and you potentially ruin the benefits that the retirement plans were designed to give you. Some studies estimate that as many as 28% or more 401k retirement plan holders have taken out loans against their 401k plans.

Your 401k Retirement Plan Is Not An Emergency Fund

Ruins Future Earnings

Many people think that borrowing money from their 401k retirement plans is no big deal because they are simply paying themselves back with the interest on the loan. While that is true, borrowers are missing out on compounding interest that that loan amount would have produced over the life of that investment while it is not in the account.

One of the biggest mistakes I made was borrowing about $10,000 from my 401k retirement plan after only having graduated from college for five years. I paid back my loan with interest over a three year term. But, not only was my $10,000 not earning interest during those three years.

That interest does not compound over the course of my future career. And, after just five years out of the gate from college, I have probably another good 40 years of work in my future before I fully retire.

Understanding the Ins and Outs of 401k Retirement Plans

by Hank Coleman

What if you were told that you could invest in a savings plan at work where each dollar you put into it is taken off the top? Or, the amount of your contribution will lower the amount you pay in yearly income tax? You need to understand the ins and outs of 401k retirement plans! Also, every dollar and cent you fund the account with will grow tax-deferred. Not only that, each of your 401k retirement plan contributions will make it possible for your employer to match those amounts as well. The Basics of a 401k Retirement Plan The 401k Retirement Plan is still the backbone of most Americans’ retirement planning, and it should be. When combined with the Roth … Read more