Need Cash ASAP? 4 Pros and 4 Cons of Taking a 401(k) Loan.
Key Points
You can get a 401(k) loan without a credit check, and you pay yourself back with interest.
Not all 401(k)s permit loans; check with your plan administrator.
Failing to pay back your loan as scheduled can result in steep tax penalties.
- The $23,760 Social Security bonus most retirees completely overlook ›
You're not alone if you're hurting for cash right now. Rising inflation has left many people scrambling to redo their budgets to stay on top of their bills. But sometimes, even careful budgeting isn't enough.
If you need money quickly, a 401(k) loan might seem like your best option. There are pros and cons to this approach, and it's important to understand both before you proceed.
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4 pros of taking a 401(k) loan
Here are some of the advantages of taking a 401(k) loan:
1. You usually don't need a credit check
Unlike other types of loans, 401(k) loans generally don't require you to complete a credit check. This can be a huge advantage for those with fair or poor credit who may struggle to borrow from traditional lenders.
2. You can get the money you need quickly
The time it takes to get your money from a 401(k) loan can vary, but in some cases, it may only take a few days. This makes it a good choice for those who need money quickly.
3. You can borrow up to $50,000
A 401(k) loan allows you to borrow up to the lesser of:
- The greater of $10,000 or 50% of your vested account balance, or
- $50,000
So it could be a good choice for those looking to borrow a larger sum.
4. You pay interest to yourself
You must repay what you borrow, with interest, over time. But that interest goes into your pocket instead of to a creditor.
4 cons of taking a 401(k) loan
Don't forget to weigh these drawbacks when considering a 401(k) loan:
1. It's not an option for everyone
Every 401(k) plan administrator decides whether to offer loans to plan participants. Talk to your employer if you're unsure whether your plan allows 401(k) loans.
2. You could face tax penalties if you can't keep up with payments
401(k) loans have strict repayment schedules. Failing to repay your loan on time causes the IRS to treat the loan as a distribution. You'll pay taxes on the outstanding loan amount, plus a 10% early withdrawal penalty if you're under 59 1/2.
3. Quitting your job could make the entire balance due at once
If you quit your job or are fired with an outstanding 401(k) loan, you may have to pay the entire outstanding balance at once or face tax penalties. This makes it a poor choice if you're considering leaving your job soon.
4. You'll hurt the growth of your retirement savings
Even if you pay back your 401(k) loan as scheduled, you'll likely have a smaller 401(k) balance at the end of the repayment period than you would have had if you had not taken out the loan. But you may be able to correct this by increasing your contributions in the future.
There's no clear-cut answer here. Sometimes a 401(k) loan really is better than going into debt or losing your home. But if you have other options, it could be worth pursuing them rather than tapping into your retirement savings.
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