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.