This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Investors Regret Paying Off Debt with a 401(k) Loan

NEW YORK (MainStreet) Ever wish your Future Self could go back in time and tell the Past You mistakes to avoid? It's the old "If I only knew then what I know now..." thing. Since we still don't have flux capacitors and DeLorean time machines, perhaps it's best simply to learn from the mistakes of others, especially when it comes to retirement. More than four in ten (44%) investors who have borrowed from their 401(k) retirement plan savings regret the decision.

It's a big lesson to learn. Nearly one-third (29%) of Americans who participate in a 401(k) have borrowed savings from their plan -- of those, 43% have taken out two or more loans, based on the results of a new study by TIAA-CREF.

When thinking about tapping an employer-sponsored retirement plan through a loan, you'll hear people say things like, "Why not? I'll be paying interest to myself!"

But the TIAA-CREF research says a $10,000 loan paid back over five years could mean missing more than $3,500 in potential earnings. The comparison is based on a 6% interest rate on the loan versus an 8% market return. With dividends reinvested, the S&P 500 has gained an annualized 9% return over the past 20 years.

In addition, more than half (57%) of investors cut their retirement savings contribution rate while paying back the loan.

Another downside: retirement plan loans can trigger taxes and penalties if not repaid in a timely manner. If you leave your job with a balance remaining on the loan, you may be forced to pay it off within 60 days or claim the amount as a taxable distribution.

The primary reason given by respondents for taking a loan from their retirement plan savings was paying off debt (46%). Other reasons included:

Plan participants facing an emergency need may have an alternative to a loan: applying for a hardship withdrawal, if permitted by your employer. In certain instances, such as avoiding foreclosure or to cover medical expenses, you can access your savings but not without a cost. You're likely to owe income taxes and if you're under age 59.5, you may also incur a penalty for a premature distribution.

--Written by Hal M. Bundrick for MainStreet

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 18,053.71 +23.50 0.13%
S&P 500 2,088.77 +6.89 0.33%
NASDAQ 4,806.8590 +33.3870 0.70%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs