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401(k) Loans: The Last Resort?
Jared N Barber, Edward Jones Financial Advisor, (541) 267-0240, 135 North Broadway Coos Bay
As you’re well aware, we’re living in difficult economic times. Consequently, you may be forced to make some financial moves you wouldn’t normally undertake. One such move you might be considering is taking out a loan from your 401(k) plan — but is this a good idea?
Of course, if you really need the money, and you have no alternatives, you may need to consider a 401(k) loan. Some employers allow 401(k) loans only in cases of financial hardship, although the definition of “hardship” can be flexible. But many employers allow these loans for just about any purpose. To learn the borrowing requirements for your particular plan, you’ll need to contact your plan administrator.
Generally, you can borrow up to $50,000, or one-half of your vested plan benefits, whichever is less. You’ve got up to five years to repay your loan, although the repayment period can be longer if you use the funds to buy a primary residence. And you pay yourself back with interest.
However, even though it’s easy to access your 401(k) through a loan, there are some valid reasons for avoiding this move, if at all possible. Here are a few to consider:
Considering these drawbacks to taking out a 401(k) loan, you may want to look elsewhere for money when you need it. But the best time to put away this money is well before you need it. Try to build an emergency fund containing at least six to 12 months’ worth of living expenses, and keep the money in a liquid vehicle. With this money, you’re primarily interested in protecting your principal, not in earning a high return.
A 401(k) is a great retirement savings vehicle. But a 401(k) loan? Not always a good idea. Do what you can to avoid it.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.