Scenario: I am planning to take out $40,000 out of my 401k Plan account to pay down my second
mortgage debt. I thought it will be good enough if I pay myself the interest instead of paying it to the bank. I’ve made necessary
calculations and I’ve found that I’ll be able to afford the payments. Just need to
verify if I am on the right track.
Solution:
It’s easy to borrow from your 401k plan account. There are no criteria that you need to satisfy just as is required for other loans. But you can get a favorable rate of interest, which is either equal to or slightly higher than the Prime Rate. Moreover, with a 401k loan,
you pay yourself the interest and not to any lender. Besides, when you borrow from the 401k account, you can avoid the 10% penalty which one has to pay if he withdraws money from the account prior to the period of maturity.
However, there are some downsides to borrowing from your 401k plan account. Taking out a loan from your 401k account will not leave you with sufficient cash during your retirement years. This is because once you borrow, the interest on the cash deposited will be calculated on a lower amount and hence the funds in the 401k account will be reduced. Now, if somehow you lose your job in between, the loan will become due and callable. In case you are not able to pay it off then, you will have to pay for the taxes and penalties involved.
Moreover, when you repay the loan, you will be using your after-tax dollars and again when you withdraw cash from the 401k account at retirement, you’ll be paying taxes. So, you will end up paying taxes twice. But unlike other loans, you won’t be getting any tax deduction
benefits by taking such a loan. So, I feel in a way, taking out a 401k loan will be similar to losing your future savings for today’s expenses.
Keeping in mind, the downsides of borrowing cash from 401k account, its better that you go for it only when you need cash quickly and there’s no other way out. As far as paying off your
second mortgage is concerned, it will be a good option to use any other source of funds – anything that will save your old age money
from being used up right now.
If you have queries on 401k loan or related personal finance issues, feel free to discuss it in our Budgeting and Personal Finance Forum.
Author Bio:
Samantha Taylor is a contributing writer and moderator of Mortgagefit.com
forums. She specializes in mortgage and real estate field.
