Stepping back from a difficult situation must be your “last resort,” said Joni Alt, a senior wealth adviser at Evermay Wealth Management in Arlington, Virginia. She suggested exploring other alternatives first, equivalent to a house equity line of credit.
Jeanne Sutton, a licensed financial planner at Strategic Retirement Partners in Nashville, said that in her experience, the major reasons for withdrawing from a difficult situation are medical debt and buying a brand new home. “Most of the time, they do not have higher options,” Sutton said. She said individuals with large medical bills should try to barter a payment plan before tapping into pension funds.
In the absence of other options, a 401(k) loan could be higher than a payday loan, Ms Sutton said, so long as you pay it back on time – and do not make it a habit. You won’t owe taxes and penalties with the loan. You can pay interest – but you can pay yourself because it is going to return into your retirement account.
The downside is that you’ll miss out on potential long-term market gains from borrowed funds. “You lose more value in compound value,” said Jeff Cimini, senior vp of retirement product management at Voya Financial.
And taking out a 401(k) loan could be especially dangerous in the event you’re concerned about job security, as some employers may require you to pay it back quickly in the event you leave your job or are fired.
401(k) account loans have grow to be less popular for the reason that 2008 financial crisis as hardship payout policies became more flexible, in accordance with Vanguard. For example, 2018 federal laws eliminated the requirement that employees must take out a loan before taking a tough paycheck.
Still, some data shows that 401(k) loans have also increased recently. Empower said loans were up 13 percent between September this yr and last. Vanguard said 0.9 percent of its plan participants borrowed money from retirement accounts in October, up from 0.8 percent at the beginning of the yr. However, Fidelity says the share of 401(k) savers taking out a brand new loan stays “low,” with 2.4 percent of plan participants doing so within the third quarter of this yr.