Woodbridge Investments

Should I Borrow From My 401(k)?

Americans are increasingly dipping into their retirement savings accounts well before they retire – about 40 percent of those who can borrow from their 401(k) plan have already done so.

According to new research by financial services firm TIAA-CREF, the typical reasons to tap into a 401 (k) are paying off debt, basic fiscal survival after a job loss, and medical emergencies. But 20 percent of people who withdraw money are using it to pay for home renovations, weddings or expensive vacations.

Risky Loans

Almost half of the people who borrowed funds from their 401(k) say that they now regret taking the loan. But once people dip into their 401(k) they are likely to do it again. As many as 43 percent of those surveyed have taken out at least two loans from their retirement plan. Nearly half borrowed more than 20 percent of their savings. About one in 10 borrowed 50 percent.

Using 401(k) funds for purposes other than retirement impacts the borrower’s future security. In this uncertain labor market, people should be aware that if they have to or choose to leave their job before they can pay back the loan, the loan is considered a distribution, subject to taxes and a 10 percent early withdrawal penalty if you’re under age 59 1/2. (Most plans provide a grace period of 60 or 90 days for loan repayment if you do leave your job). You will also have to repay the loan in full before you take a plan distribution.

Future Problems

People who take out loans typically further impact their retirement plan by reducing their 401(k) contribution rate while they are paying back the loan. And that’s assuming that they can pay it back, according to a recent study by the Wharton School at the University of Pennsylvania, the 401(k) loan-default amount is $6 billion annually.

The reason most people cut back on their contributions is because payments on 401(k) loans usually are taken directly out of each paycheck, so you’ll see a cut in your take-home pay.

But Sometimes It Makes Sense

If you have a significant financial need, and can pay the loan back over the next year or so, borrowing from your 401(k) plan can be the right move. You don’t have to pass a credit check, like you would with a standard bank loan. The interest you pay will likely be less than what you’d pay for a bank or other consumer loan.

It may make sense to look into a home equity loan before you dip into your 401(k). And if you have a structured settlement or annuity payment, you might choose to sell some or all of your payments in exchange for a lump sum payment.

Have Questions About Borrowing From Your 401(k)? Call Woodbridge!

To find out more about selling your structured settlement or annuity through Woodbridge Financial Services, you can review frequently asked questions about structured settlements here, or call us at 1-866-865-7044 to get a free quote.