In our last blog post, we introduced a few questions every 401k loan taker should find out answers first. Now we will discuss why a 401k loan should be your last resort to solving whatever financial problem your are facing.
Double Taxation of 401k Loan
You pay back your loan with after-tax dollars. For example, if you are in 25% tax bracket. To pay back $1,000 401k loan, you need to earn $1,250. Furthermore, your 401k money will be taxed again when you use it during retirement time.
Risk of Losing Job While Having the Loan
If you leave your employer or got laid off, you would have to pay back the 401k loan within 60 days. If you don't repay within the time frame, your loan will be treated as a distribution and subject to income tax and 10% penalty if you are under age 59.5.
Bad Habits Could Hurt You In the Long Term
If you find it easy to borrow from your 401k and treat it as your checking account, you are on a dangerous path. An research shows that almost 50% of 401k loan borrowers come back and borrow again. Given that 401k plan is for retirement purpose, it's best to leave it for that purpose, because it could take many years for 401k balance to grow high enough to meet your retirement needs.
Double Taxation of 401k Loan
You pay back your loan with after-tax dollars. For example, if you are in 25% tax bracket. To pay back $1,000 401k loan, you need to earn $1,250. Furthermore, your 401k money will be taxed again when you use it during retirement time.
Risk of Losing Job While Having the Loan
If you leave your employer or got laid off, you would have to pay back the 401k loan within 60 days. If you don't repay within the time frame, your loan will be treated as a distribution and subject to income tax and 10% penalty if you are under age 59.5.
Bad Habits Could Hurt You In the Long Term
If you find it easy to borrow from your 401k and treat it as your checking account, you are on a dangerous path. An research shows that almost 50% of 401k loan borrowers come back and borrow again. Given that 401k plan is for retirement purpose, it's best to leave it for that purpose, because it could take many years for 401k balance to grow high enough to meet your retirement needs.
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