5 Reasons to Avoid This Retirement Mistake

Filed under: Retirement

You’ve been saving faithfully for years, stashing money for retirement, but now you’re facing an emergency. You’re tempted to borrow money from your 401(k) fund. After all, it’s your money! What could go wrong?

Actually, plenty could go wrong, and taking out a 401(k) loan is almost always a terrible idea. While there are many more reasons for avoiding these bad deals, here are the top five reasons you should leave your money in the fund.

Lost time. In most cases, you won’t be able to make contributions to your 401(k) while you’re repaying the loan. During this time, whether it is months or years, you will be losing valuable time that you should be using to prepare for retirement.

Lost interest. Building a retirement fund isn’t all about the principle you accumulate through your contributions. A large part of your nest egg grows from interest, which accumulates over time. When you withdraw money from your 401(k) fund, you will lost all of the interest that would have accumulated on that money. You can repay the funds you borrowed, but you can never get that interest back.

You could default. What happens if another financial emergency comes along, and you can’t make your loan payment? It’s not like defaulting on a car loan, when the bank simply comes to repossess the vehicle. When you default on a 401(k) loan, you can be charged a 10 percent withdrawal penalty on the amount you withdrew. Plus, you might trigger serious income tax consequences.

The cost of lost opportunity. Many 401(k) loan provisions require you to repay all of the loan immediately if you separate from your employer. If a higher-paying position with another company comes along, or you need to relocate and take a different job, you stand to lose valuable opportunities if you can’t repay the entire loan. How much is your freedom worth to you? How much money could you lose over the years, if you’re forced to turn down a better job?

It’s just a bad sign overall. If you’re tempted to borrow from your 401(k) fun, this might be a sign that you’re already living beyond your means. What happens if you experience another financial emergency? Rather than slapping a Band-Aid on the problem, you would be wiser to investigate your financial practices and get to the root of the real problem. The last thing you want to do is dig yourself into a deeper hole.

15177 – 2015/12/10