Is Borrowing From Your 401(k) a Good Idea?

In many cases, yes — but make sure you know these 5 crucial rules before taking out a loan

by Richard Eisenberg • Next Avenue
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I'd like to throw in my two cents on a vital topic: "Does It Ever Make Sense to Dip Into Your 401(k)?" The subject was recently addressed on the PBS NewsHour website by the show’s business and economics correspondent, Paul Solman, who will soon begin answering Next Avenue readers' questions about personal finances and the economy. (Details below.)

In his "Making Sen$e" column, Solman focused on whether it's advisable to “pull money” from a retirement fund, like a 401(k), rather than going into credit-card debt.

Solman's wisdom: Taking out a 401(k) loan to avoid deep credit-card debt absolutely makes sense, generally speaking.

His rationale, assuming your plan allows loans: When you borrow from your 401(k) — by law you can withdraw up to $50,000 or half the account's value, whichever is lower — you’re paying the interest to yourself as you repay the loan. So, Solman says, the net cost is zero. (I have some views on this, below.)

I agree that taking out a 401(k) loan instead of running up a high-interest credit card can be a smart financial move. There’s very little paperwork and you won’t go through a credit check.

Indeed, 21 percent of all Americans with 401(k) plans (22 percent in their 50s) have taken out a loan, according to the Employee Benefit Research Institute. Minorities are nearly twice as likely to dip into their retirement accounts: The Ariel/Aon Hewitt study, "401(k) Plans in Living Color," found that 49 percent of African-Americans and 40 percent of Hispanics of all ages took 401(k) loans in 2010, compared with 26 percent of whites.

Read the rest of the article on Next Avenue

Next: Women Need to Get Serious About Emergency Savings

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