Fact vs. Fiction Archive

Fiction: Taking a loan from my retirement plan is not a big deal—I can always fund my retirement later.

Fact: Borrowing from your 401(k) or other retirement plan is a major decision that should not be made lightly. Several issues could affect your ability to continue to make headway on your retirement goals. These include double-taxation (you will repay the loan with after-tax dollars, and because the interest you pay is not tax-deductible, you will pay tax on it again when you do retire and start withdrawing funds) and reduced take-home pay until you make good on the loan. Also keep in mind that your repayment schedule will accelerate if you leave your company, and if you fail to repay by the deadline, you will trigger a taxable event (your loan balance would be treated like a distribution and you would have to pay the 10-percent early withdrawal penalty if you are younger than age 59½). Lastly—but no less important—you lose the magic of compounding for any funds you take out prematurely.

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