Money Manager: The peril of 401K loans

Print
Email
|

by ERIC AMADO

WFAA contributor

Posted on July 9, 2011 at 12:08 PM

Think twice about paying off your old credit card debt, bills or vacations with your 401k plan. It may seem convenient, but it could put your retirement goals in serious jeopardy.

The economy added only 18,000 jobs in June, far below the number predicted by most economists. Unemployment is now sitting at 9.2 percent. This news is a good reason not to borrow from your 401k retirement plan, which can break your investment growth momentum.

Money grows over time. If you are investing regularly, time is your friend. If you withdrawal your money from your 401k, you are missing out on some serious growth opportunities linked to the ups and downs of the stock market. This could mean the difference between having $50,000 and $500,000 in retirement savings.

Don't forget: If you leave your job, do you have to pay off any 401k loans, because that loan is tied to your employment. At some point, you will be leaving your employer. Regardless of how or when you leave, the loan will need to be repaid pretty quickly.

If you don't repay a 401k loan within 60 days of leaving your current employer, the IRS will view the remaining amount due as a distribution, or withdrawal. Unless you are at least 59 ½ years of age, you will be taxed at your current tax rate plus 10 percent for an early withdrawal penalty.

For most Americans, a 401k account will become the major asset for their retirement. Recent reports show that Americans are saving about 5 percent of disposable income. Most American need to save between 15 and 20 percent or more of disposable income to keep up with the cost of living and investment losses over the last several years.

If you really need money for an emergency or crisis, consider contacting a close family member or friend that you know that can help you. It's cheaper — and you don't have to touch your retirement funds or go to a bank.

Print
Email
|