Should You Borrow from Your 401(k)?
When you borrow against your 401(k), you’re not just taking out a loan; you’re giving up the potential growth your investments could have earned.
While tapping into your retirement savings might seem like an easy solution, Matt breaks down the hidden costs and long-term consequences that often go overlooked. Listen as Matt dives into the important factors to consider before borrowing from your 401(k).
Transcript
Thinking about borrowing from your 401k? You're not alone. And yes, you're technically borrowing from yourself. But there's more to it than that.
When you take a 401k loan, the money comes out of your investments. You can borrow up to 50% of your vested balance, or $50,000 max.
You repay it with after tax payroll deductions plus interest, but that interest goes back into your account. Sounds great, right? Well, here's the catch. While the money is out on loan, it's not growing.
Borrow $20,000 and repay about $23,000 over five years at 6% interest. But if you'd left that invested at 7%, you'd have around $28,000 instead. That's nearly $5,000 in missed growth.
And if you leave your job before it's paid off, the remaining balance becomes taxable income and possibly a 10% penalty. So yes, you're borrowing from yourself, but also from your future growth. If it helps you pay off high interest debt, it can make sense.
Otherwise, think twice before tapping your retirement. I'm Matt Wilson. Thanks for joining me for another Money minute with Matt.
Thanks for subscribe to the Live well podcast on YouTube or anywhere you listen and visit mattwilsonfinancial.com to learn how to live well financially and personally.
