This Day On The Street
Continue to site
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

Here's the Only Way You Should Borrow From Your 401(k)

NEW YORK (TheStreet) -- Anyone with a home or rental payment and a mountain of bills on top of that can relate to the temptations of borrowing from your 401(k).

The fact is, though, you shouldn't do it -- at least almost never.

Not many people take a loan from their 401(k) plan. According to a recent study from TIAA-CREF, only 29% of Americans have, and of those, 44% say they "regret the decision."

"Paying off debt was the top reason for taking out a loan from retirement plan savings, cited by 46% of respondents, yet only 26% of respondents said paying off debt was a good reason to take out a loan," TIAA-CREF says. Women were more likely to take out a 401(k) loan, by a 51% to 42% margin over men.

Also see: Debt Is Dragging Down the American Dream

Pamela Yellen, a consumer financial consultant and two-time New York Times best-selling author, says the 401(k) has replaced mortgage lending as a "pricey piggy bank" with huge costs for those who borrow from their plans.

"Just because you can take a premature withdrawal or a loan from your 401(k) doesn't mean it's a good deal," she says. "The Internal Revenue Service collected $5.7 billion in 2011 from penalties, meaning that Americans took about $57 billion from retirement funds that they weren't supposed to."

Yellen adds there are many strings attached to borrowing from a 401(k) plan, including how much you can borrow, what you can borrow it for and how and when you must pay it back. "And if you leave your job for any reason, you'll typically have to pay the loan back in full, with interest, within 30 to 60 days or you'll owe taxes and penalties," Yellen says. "And you thought it was your money!"

Here's how a 401(k) loan can set you back financially, in ways you probably haven't considered.

Also see: Most Companies Fail Workers on Automatic Enrollment, Hikes in 401(k)s

If you take out a loan from your 401(k) and can't pay it back, you'll be on the hook for taxes with the IRS, plus get socked with an extra 10% penalty if you're younger than 59.5, the age at which you're allowed to make an early withdrawal. "In most cases you're required to pay your loan back in full with interest in 30 to 60 days, or you'll have to pay income taxes on the money you borrowed plus a 10% penalty," Yellen says.

If you absolutely have to take out a loan out to prevent against a financial catastrophe such a home foreclosure or from having your car repossessed, go ahead -- just make sure you structure the loan in a way you can manage to pay it back, avoid denting your 401(k) plan too much and avoid IRS tax penalties.

Those situations are the exception. In the vast majority of cases, taking a loan from your 401(k) can set your retirement back years if you don't pay the loan back promptly -- so it's best to avoid the temptation.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

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
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

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

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
AAPL $125.33 -1.10%
FB $86.46 -1.80%
GOOG $523.94 -1.50%
TSLA $265.16 -0.72%
YHOO $39.34 -1.80%

Markets

DOW 17,680.53 +84.18 0.48%
S&P 500 2,057.64 -43.85 -2.09%
NASDAQ 4,958.4680 -122.0370 -2.40%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs