When experiencing financial difficulties, it can often be tempting to borrow from your own retirement account. Although taking out a loan on your 401(k) is a viable option for individuals that are experiencing financial problems, it is typically seen as a bad idea to withdraw money from the account, much in the same way that payday loans are seen as a generally unwise long term financial investment. There are serious consequences that come with taking money out of these accounts, which can vary greatly depending upon the institution that you are using. Not only will you be subjected to a variety of different fees and penalties, but you will also be expected to pay the loan back over time. Most of the time it makes more sense to apply for a small loan instead. The reasons for taking out a loan on your 401(k) plan are a bad idea including the examples below.
Hardship Withdrawal
The first thing that you need to look into when you are considering taking out a loan from your own 401(k) account is to look into whether or not you meet the hardship withdrawal requirements. The hardship withdrawal requirements are a series of reasons that are deemed acceptable to make a withdrawal from your retirement account. Some of these conditions include medical expenses for you, a spouse, or dependence within the house, preventing foreclosure and eventual eviction from your home, college tuition for you were individuals within your family that are dependent upon you, expenses for funerals after a death within the family, or repairing damage to your home. There are only a few conditions in which you can qualify for a hardship withdrawal, and you need to be certain that you check to see whether you fall within those conditions.
That Money Stops Earning
When you take money out of your 401(k) retirement plan, you also have to realize that that money stops earning once it leaves the account. The idea of a 401(k) account is that the money that you contribute to it will continue to earn and work for you, while it is within the account. As you withdraw money from your retirement account, you will find that your portfolio earnings will drop in amount that is dependent upon the amount that was withdrawn from the account, and that that money will not be earning interest during that time period.
Slowed Contributions
Unfortunately, when individuals take out a loan on their retirement account during financial hardship, many of them stop making contributions into the account. This is something that you should look to avoid at all costs. Even if you are forced to take a loan out of your 401(k) retirement plan, you should attempt to keep up the same pace of contributions that you always have, growing the account and preparing for retirement even during financial hardship.
Fees and Penalties
You also have to take into consideration that there are multiple fees and penalties that may apply to your situation if you choose to withdraw money from your 401(k) plan. These fees may include a percentage of the amount withdrawn, or a standard set fee for each withdrawal, and each is going to be dependent upon the institution that you are banking with, and who is handling your 401(k) account.
