COLORADO SPRINGS – Millions of Americans tap into their retirement funds each year and for some, it could be a recipe for disaster.
Our partner at Carlson Financial said borrowing from plans like a 401(k) may just cost you more in the long run.
Carl Carlson, CEO of Carlson Financial, said people sometimes do this “to add on to their home or buy a boat, or they just need some extra money or to pay off some credit cards, even sometimes a vacation.”
However, Carlson said doing this should be a last resort.
“There’s a lot of reasons to borrow from a 401(k). There’s just not a lot of good reasons to borrow from a 401(k).”
Carlson said most plans allow you to borrow up to 50 percent of the vested balance in your 401(k). The maximum is $50,000.
“You have to pay it back within a certain number of years, most of them are five years, and they just take it out of your paycheck so you can’t say I can’t make the payment this month. It’s automatic.”
It means you better make sure you still have enough to live on.
When you consider interest rates Carlson said “you might be looking at 4-6 percent is the interest rates you’ll be paying.”
People should also consider the double taxation that comes with this loan.
“If you borrow against it now you’ve got this money back out of your 401(k), but now in order to get the money back in you have to earn money, pay taxes on the money you earn, and then put it back in and it’s going to be taxed again when it comes out.”
In the end, people should remember what that 401(k) is truly for.
“That is also your retirement money so I just wouldn’t be messing with it too much.”
Carlson said something else to consider is that if you borrow from a 401(k) and then change jobs you usually have only 60 days to pay it back. If you don’t, the company will force money out of your 401(k) to pay off the loan.
Carlson Financial is a sponsor of Financial Focus.