Avoid This Common Retirement Mistake

You’ve worked hard to save for retirement, and you’ve accumulated a tidy nest egg. But now you’re facing a financial situation, and you’re tempted to borrow from your 401(k) fund. There might even be people trying to convince you that this is a good idea.

In most cases, borrowing from your 401(k) could really backfire, for the following reasons:

You lost more than the principal. Technically, you aren’t “losing” your principle, since you plan to repay what you borrowed. But you will be missing that money from your fund temporarily, and you will lose all of the interest that would have accumulated on it. Unfortunately, there isn’t much you can do to make up for that lost time.

You will lose time to save. In most cases, you aren’t allowed to make contributions to your 401(k) while you’re repaying a loan you took from it. So you lose not only the interest that would have accumulated on that money, but you also lose time that you would have been saving toward your retirement.

You could put yourself in jeopardy. With any loan, there is a chance that you won’t be able to repay it for some reason. Whereas a car is simply repossessed if you can’t pay for it, defaulting on a 401(k) loan could result in a 10 percent withdrawal penalty along with certain income tax implications.

You could trap yourself. Most 401(k) funds require all loans to be repaid immediately if you separate from your employer. This might not sound like a problem, until a better-paying position comes along. Or, perhaps you need to take a different job and relocate for personal reasons. Whatever the case, unless you can immediately repay the loan then you won’t be able to change jobs. The cost of missed opportunities could be great.

You might be placing a Band-Aid on a larger problem. If you’re tempted to borrow from your 401(k) fund, it might be because you’re already living beyond your means. You could borrow the money this time, but unless you address your budgeting habits you might just face another emergency in the future.

Rather than digging yourself into a hole and regretting the choice, it’s almost always better to find some other way to address financial emergencies. If you have any questions about your retirement fund or money management, call our office to schedule a consultation.

15158 – 2015/12/10