Borrowing from 401k Most workers with 401(k)s can borrow from their plans. And a growing portion of 403(b) plan participants can too. If you've been consistently putting away a portion of your salary and also your match over the past several years, chances are that puts a lot of cash in your 401k plan. It certainly doesn't make sense to use this money for luxuries but does it make sense to tap your 401(k) or 403(b) to pay off credit cards or private unsecured loans with huge interest rates?
Borrowing from 401k - Limits
Typical plans allow you to borrow up to half your vested balance, but not more than $50,000. Some plans might restrict borrowing to specific reasons, like a home purchase, job loss, education or medical expenses. You usually must pay the money back, with interest, over five years. But, because you are paying the interest to yourself, it isn't an additional cost. Just think of it as forced savings. If you don't repay the loan, you will owe income tax and a 10% early withdrawal penalty.
Borrowing from 401k - Drawbacks
There are a couple of big drawbacks. First, you are giving up the tax free compounding of the money you withdraw. That could lead to a signficantly smaller nest egg come retirement. Also, if you leave your current employer for any reason, you will probably have to pay the loan back immediately or face taxes plus a penalty.