Through this tough economy, about 18 million people have taken loans from their 401k plans. Although most Americans know it’s essential to plan for retirement, many simply don’t have a choice but to borrow from their savings. It seems like a smart move at the time considering there’s no application to fill out, you won’t be denied and the interest is fairly low (interest that you pay to yourself).
There is a serious downside to this idea: if you lose you’re job, you have 60 days to repay the loan or it becomes default. According to Custodia Financial, about 10% of loans default because of unemployment. Not only do the defaulted loans make a huge dent in your savings, but the IRS sees it as a distribution now so you have to pay taxes on it and pay the penalty if the distribution wasn’t allowed.
Custodia’s solution is to offer credit insurance if you default on a loan and repay the loan balance in event of death, disability or involuntary job loss. Employers have been reluctant to offer this, however proposed Retirement Savings Security Act would give them the comfort they need to offer products like this.
In conclusion, if you don’t absolutely have to, avoid dipping into your 401k. Read more about this here.
In need of advice? The IRA Financial Group is here for you!