The lure of a 401(k) loan could mask its risks

Advisors


If you don’t come up with the cash by the time your federal return is due, the loan morphs into an early distribution and is generally subject both to income taxes and the 10 percent early-withdrawal penalty if you’re under age 59½.

Although many financial advisors say 401(k) loans should be off-limits entirely, others say it can sometimes make sense.

“I’ve seen where people might be in a bad situation, like they lost a loved one or they’re about to lose their home, and they feel like there’s no other option,” Dwyer said.

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She also has seen some fairly frivolous reasons for wanting to pull money out of a retirement account — such as installing a basketball court or swimming pool — whether through a loan or outright early distribution.

Credit-card debt is cited as the top reason people take a 401(k) loan, according to research from Fidelity Investments.

Edelman at Edelman Financial Services, who believes all 401(k) loans are a bad move, said that on top of the short-term risks, the long-term implications are the biggest problem.

“You’re going to encounter many financial challenges in life and there will always be temptations to borrow money from your 401(k),” he said. “But if you divert that money away from your savings now, you will regret it in retirement.”



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