Great 401k Insights
By
VendorSeek
 Most companies offer 401k options and most employees opt to participate. You know what is also popular with those of us who invest into it? - Borrowing back from it. A recent study reflects that nearly twenty percent of those who have the option of borrowing from their 401k, exercise this option. It seems that the older an investor becomes, the less likely they will be to take back from it, but dipping into it at all is not a good idea. It is an investment to your future -not a piggybank to be eventually broken into.
Borrowing = Bad Idea Some gravitate towards borrowing from the 401k because the interest rate charged is significantly lower than if borrowing from a commercial loan. Another attraction is the thought that when repaying, you are paying yourself back with interest instead of a bank. Despite these claims, taking from your 401k transgresses almost every time-tested principal of long-term investment. If you are thinking about taking from your 401, think first about getting investment help about your 401k/retirement plans.
"Every great mistake has a halfway moment, a split second when it can be recalled and perhaps remedied." Doesn't Make Cents If borrowing from your 401k, most are fitted with a provision that prohibits you from making additional contributions until the loan balance is paid back. Some plans do not have this provision, but it will not seem realistic that you are making any additional contributions in addition to taking care of the loan payment. The nature of existence of the 401k is to save for your retirement; if you are taking out of it now, aren't you exercising some faulty logic?
Missing Out on Money If not contributing to the plan, the entire balance is missing out on potential growth in stock or bond markets and each future contribution you're not making (since you have an outstanding loan balance) is not making money for you as well. The exceedingly low interest rate you are paying to borrow from it should not make you happy if you consider the return on investment you are missing out on by not having all initial sums in there on top of regular investments. You are also paying yourself back with after-tax money; while smiling about the low-interest rate, frown about being murdered on its tax implications.
Time is Working Against You The nature of long-term investment is anchored in the idea of putting time to work for you (your money will slowly but surely grow). Money managers suggest that your money will essentially double at a rate of every eight years. If you are using your fund for a loan, you are losing out on the opportunity to double your money; in addition, you are losing out on the growth opportunity it had being untouched. No matter what, over time, you are unlikely to make up for that total of what the fund would have been if you left it alone initially.
When it Rains. Sometimes things can get even worse. Imagine if you find yourself in the position where you cannot repay the loan; it will be treated as a withdrawal and the outstanding loan balance will be subjected to current income taxes in addition to a ten percent early withdrawal fee.
Tied into Your Job If caught in the situation of having an outstanding loan, most plans will require it to be paid immediately if you quit your job. Unless you are moving up significantly on the pay scale, you will feel trapped in your current job situation (remember you will still have to pay the loan back as a withdrawal subject to current income tax and the ten percent fee).
You Need a Last Resort Taking from the 401k should be the last financial trick up your sleeve. Sure it may sound good to borrow from the plan to engage in a well-needed vacation, but what if the occasion arises in which you really needed it, the money will be left with the memories of the vacation- that better have been some vacation!
"The mistakes we aren't allowed to make to make in our youth, we make later on in life- at greater cost and with less benefit." Be a Realist If thinking about borrowing from your 401k, you should really take a breath and step back for a moment. Are you living a bit beyond your immediate means (its OK, we all do it; that is why credit card companies make trillions of dollars  off of us)? Evaluate yourself, living situation, and spending habits. Is whatever you are about to jeopardize your financial future for (by borrowing from the 401k) worth it (there should not be many instances where you can respond in the affirmative)?
Be a Thinker Not a Spender Hopefully, some of this information is helpful, especially to those on the brink of making a very unwise financial decision. Borrowing from your 401k should not really be an option unless you are in dire need (is Vinnie threatening to break both your legs)? Invest in your future and live right now amidst your immediate means. The nature of the 401k is to produce a long-term reward- think about it as another payment you have to make and eventually, when the time comes, your dear old uncle Sammy will leave you a large gift at your retirement party.
"It is worse than a crime. It is a blunder."
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