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Optimal Living Daily. This

1:10

is Optimal Finance Daily, episode 2691. Is

1:14

it ever okay to borrow from your 401k? By

1:17

Mark Dennis of financialfinesse.com. And

1:20

I'm your host and personal finance enthusiast,

1:23

Diana Merriam. Welcome. Back

1:25

to Optimal Finance Daily where every day I

1:27

read an offer commentary on some of the

1:29

best personal finance bugs on the web and

1:31

about ten minutes or less. So.

1:34

With that, let's get right to it as we

1:36

optimize your life. Is.

1:41

It ever okay to borrow from your four o

1:43

one k. By. Mark Dennis of

1:46

Financial Fun as.com. Ideally

1:49

never. Or at least rarely.

1:52

Plundering. Our retirement piggy banks can

1:54

be tempting when a financial emergency arises.

1:56

or perhaps when we're looking for cash to

1:58

finance a home purchase or pay off

2:01

some high interest credit cards. Although

2:03

the IRS rules do allow for

2:05

retirement plan loans, the maximum loan

2:07

size is either one, the

2:10

greater of $10,000 or half of your vested 401k balance, or

2:15

two, $50,000, whichever is smaller. While

2:19

borrowing from yourself in this way can be

2:21

convenient and seem relatively harmless, this

2:24

type of short-term fix may have

2:26

some long-term consequences that are more

2:28

expensive than we realize. 401k

2:31

loans seem attractive, at first.

2:34

On the one hand, borrowing from our company

2:37

retirement plans is tempting for several reasons. No

2:40

credit check is required and consequently, it'll not

2:42

affect your credit score. The

2:45

interest rate is potentially lower than that of

2:47

a traditional loan. You

2:49

pay back the loan conveniently through

2:51

payroll deduction and

2:53

you're borrowing your own money and paying

2:55

yourself back with interest. Where's the

2:57

harm, right? Then things

2:59

can get ugly. A

3:01

closer examination of exactly how all of

3:03

the moving parts work as well as

3:05

some of the things that could potentially

3:08

go wrong might lead you to conclude

3:10

that getting a bank loan, borrowing against

3:12

home equity, selling other assets, or even

3:14

borrowing from family might be better for

3:16

you in the long run. Here

3:18

are some of the reasons to think twice before taking

3:21

out a 401k loan. Number

3:23

one, you'll pay taxes on the

3:26

same money twice. It's

3:28

true that you pay yourself back with

3:30

some interest, but you also use after-tax

3:32

dollars to make those interest payments. In

3:35

the future, when you spend your pre-tax 401k money

3:38

in retirement, those future interest distributions

3:40

will be taxable as ordinary income,

3:42

meaning you actually pay taxes twice

3:45

on that money. Number

3:48

two, lost growth and compounding.

3:51

The money you borrow from your 401k is

3:54

temporarily removed from the underlying

3:56

investments, missing out on any

3:58

market growth, interest, dividends, The

4:01

double whammy comes from the missed

4:03

opportunity for this growth to be

4:05

reinvested and earn even more through

4:07

compounding, which is the financial superpower

4:09

that comes from investing and staying

4:12

invested over time. Number

4:14

3. Treating Your 401k Like

4:16

an ATM Once

4:18

you dip into your retirement stash and use it

4:21

to relieve some type of financial pain, you

4:23

can begin to slide down a slippery

4:26

financial behavior slope. Having

4:28

rewarded yourself once with a relatively easy

4:30

source of cash, you run the risk

4:33

of training your brain to think of

4:35

this strategy as a reasonable substitute for

4:37

creating and maintaining better financial habits, such

4:40

as regularly saving cash in an emergency

4:42

fund, sticking with a budget, or

4:45

increasing your retirement plan contribution rate.

4:48

Staying faithful to healthier financial

4:50

priorities helps you avoid disturbing

4:52

your retirement plan's progress by

4:55

treating it like an ATM machine

4:57

and dipping into it multiple times.

5:00

Number 4. Less Take Home Pay While

5:04

you're repaying your loan, your paycheck will be

5:06

reduced by the amount of the loan repayment.

5:09

If your cash flow is tight before rating

5:11

your retirement fund, you may soon discover that

5:13

it becomes even more challenging with a reduced

5:16

paycheck. And number 5. Severe

5:19

Taxes and Penalties If

5:21

you leave your employer for any reason, whether

5:23

it's your idea or if your employer fires

5:26

you, you might have to repay the entire

5:28

remaining loan balance within as little as 60

5:30

to 90 days. This

5:33

requirement varies from plan to plan. Some

5:35

company retirement plans allow you to continue

5:37

making the scheduled loan payments without having

5:39

to pay it all back early. However,

5:42

your payments obviously will no longer come

5:44

from payroll deduction once your job ends.

5:47

If your period of unemployment is lengthy,

5:49

you might not be able to keep

5:51

up with the required repayment schedule. Once

5:54

You default on a 401k loan, the

5:56

IRS then treats any remaining balance as

5:59

a taxable. To be seen. If

6:01

you're under age fifty nine and a

6:03

half at that time, there may be

6:05

an additional ten percent tax penalty for taking

6:08

an early withdrawal from your retirement plan.

6:10

What? Was once a temporary financial

6:12

six could quickly become an expensive

6:15

pox bomb. It

6:17

might be okay to borrow once is.

6:20

Number one, you have a high interest

6:22

rates think double digit death and he

6:24

had exhausted all other options to resign.

6:26

He have already do a lower. Interest

6:28

rates. Be. Ongoing challenge

6:30

will be to reduce any temptation

6:32

to begin using the same high

6:35

interest credit cards or loan sources

6:37

again and recreate the problem. Once.

6:39

You pay back the four o one

6:42

K loan, take that monthly loan payment

6:44

you were making and redirected to a

6:46

savings account, your bank, building up an

6:48

emergency funds you can use for future

6:50

financial emergencies rather than reading your retirement

6:52

plan like a parrot. Number

6:54

till you owe the Iris back

6:57

taxes. With. Interest and

6:59

penalties stacking up on overdue taxes.

7:01

this financial burden can become very

7:03

serious over to him. In.

7:05

This case of four one k loan might be

7:07

you're saving grace. However, you

7:09

may qualify for release under the

7:11

iris guidelines for alternate payment plans

7:13

and hardship. Number. Three,

7:16

You're in real danger of defaulting on

7:18

a student loan. In most cases,

7:20

bankruptcy is not an option for these.

7:23

Or. Number for you're. Facing eminent

7:25

bankruptcy or a vixen from your

7:27

home, Talk. To

7:29

a nonprofit consumer credit

7:32

counselor at nfcc.org about

7:34

alternatives to bankruptcy. Of.

7:36

A Four O One K loan can buy

7:39

you some valuable time while you restructure your

7:41

cash flow and other investments to support a

7:43

sustainable strategy and repay your Four O One

7:45

K loan. This. Might be

7:47

inappropriate Financial move. The.

7:50

important things to keep in mind regarding

7:52

loans from your retirement plan is to

7:54

make sure you address the underlying me

7:56

for cause rather than simply assuming the

7:58

four o one k alone will solve

8:00

the a me problem. Otherwise you could

8:02

find yourself on an unhealthy financial

8:04

treadmill where you repeatedly borrow from

8:06

your 401k and begin to seriously

8:08

jeopardize your ability to retire on

8:10

time, comfortably, or both.

8:14

A good way to see just how

8:16

damaging and expensive a retirement plan loan

8:18

can be to your financial future is

8:20

to use the National Center for Policy

8:22

Analysis 401k borrowing

8:24

calculator. This calculator

8:27

shows how much less money you may

8:29

have for retirement if you borrow from

8:31

your retirement plan versus not taking a

8:33

401k loan. Bottom

8:35

line, make sure you have carefully

8:37

considered all other alternatives before you

8:39

undo much of the hard work you've

8:42

already invested in growing your retirement nest

8:44

egg. You

8:49

just listened to the post titled, Is it

8:51

ever okay to borrow from your 401k? by

8:55

Mark Dennis of financialfinesse.com and

8:57

I'll be right back with

8:59

my commentary. Have you been using

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10:01

I'm sure there are

10:03

probably situations where a

10:06

401k loan is a good idea, I personally

10:16

cannot think of even one. For

10:19

me, taking on a 401k loan

10:21

would require some pretty dire circumstances,

10:23

where I needed money immediately for

10:25

some life-threatening emergency. I had

10:28

no other reserves, no options for

10:30

increasing my income, I didn't qualify for any

10:32

other type of low-interest debt, and no one

10:34

on the planet was willing to lend me

10:37

some money. I can't imagine

10:39

why I would need a loan so bad

10:41

that I would risk my retirement savings and

10:43

that I'd be willing to interrupt my money

10:45

earning more money. I

10:47

mostly hear of people taking a 401k loan

10:49

to fund a down payment on a house,

10:52

do home impresence or consolidate

10:54

debt. That sounds ludicrous

10:56

to me. When I invest my

10:58

money, I do it for the long term, and I'm

11:00

so firm in my commitment to not touch the money

11:02

I have invested, I actually think of it

11:05

as a tax I've paid to my future self. That

11:07

money is gone, I have no claim to it, because

11:10

it's not my money. It's future

11:12

Diana's money, and she says no anytime I

11:14

ask for some. That

11:16

should do it for today, have a happy rest of

11:18

your day, and I'll see you on the Monday show

11:20

tomorrow, where your optimal life awaits.