Meghan Hannon Featured on Kare 11 News | Pros and Cons of 401(k) Loans
January 3, 2024
Meghan Hannon, CRPS®, Senior Retirement Plan Manager, was featured on a Kare 11 News segment in December. In the segment, Meghan shares guidance for workers considering 401(k) loans to help make ends meet, while staying on track for retirement.
As Meghan advises, it’s important to keep in mind the various pros and cons of borrowing from your employer 401(k) plan. Though a 401(k) loan may be cheaper and faster than other types of credit, borrowing may also put your retirement goals at risk. Advantages, drawbacks and alternatives are summarized below. For more information and guidance, connect with a member of the Boulay Financial Advisors, LLC team today.
Pros and Cons of 401(k) Loans:
If you find yourself in an emergency with limited funds and options, a 401(k) loan may be worth considering to help bridge the financial gap. A 401(k) loan allows you to borrow from yourself and pay yourself back with interest. You may also continue contributing to your 401(k) while you repay the loan, an option which may not be available with a hardship withdrawal. Other potential advantages of 401(k) loans include:
- Simple application process compared to a bank
- No taxes or early withdrawal penalties, as long as you don’t default on your loan
- Potentially lower interest rates than traditional loans
- No impact on your credit report
- Ability to repay with automatic payroll deductions
However, a 401(k) loan is not without its pitfalls. First you must consider the opportunity cost—anytime you pull money out of the market, you’re missing out on potential investment gains and compounding returns. Beyond these opportunity costs, which can derail your retirement readiness, other factors to consider include:
- Not all 401(k) plans allow loans
- The IRS sets limits on 401(k) loans (currently, you can borrow up to 50% of your vested account balance or $50,000, whichever is less)
- You can’t discharge 401(k) loans in bankruptcy
- The payment schedule is strict, and if you leave your employer, you likely will need to repay your loan in full in a very short time frame. If for any reason you are unable to repay the loan, it’s considered defaulted, and you’ll owe both taxes and a 10% penalty if you’re under age 59½
Generally, 401(k) loans should be approached with caution and reserved for emergencies or essential needs—these loans should not be seen as a routine source of funds.
Alternatives to Consider:
Before taking out a 401(k) loan and potentially jeopardizing your retirement savings, it’s important to explore other options. The ideal place to go is your emergency savings account; however, if that is not an option, you can also consider personal loans, a home equity line of credit (HELOC) or home equity loan, or debt counseling. It’s also essential to consult a trusted wealth management advisor, who can help you make an informed decision and understand all potential consequences of 401(k) borrowing. To learn more, connect with us today or click here to watch the Kare 11 segment.
The concepts described in this article are dependent upon specific client circumstances. The implementation of an NQDC will need to be specifically tailored to your unique and specific needs, the information provided is general and does not represent any specific client scenario. For tax specific circumstances, individuals should seek individual assessments from their tax or legal professionals.
Investment Advisory Services offered through Boulay Financial Advisors, LLC, a SEC Registered Investment Advisor. Certain Third-Party Money Management offered through Valmark Advisers, Inc., a SEC registered Investment Advisor. Securities offered through Valmark Securities, Inc. Member FINRA, SPIC. Boulay PLLP and Boulay Financial Advisors, LLC are separate entities from Valmark Securities, Inc and Valmark Advisers, Inc.
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