Your 401(k) is supposed to be used in retirement and not one day before, thus making it a bad choice for those looking for a loan. You should never take out of your 401(k) unless it’s your last resort and you have nowhere else to turn for cash. Although your 401(k) might look like a good alternative for funds when you’re strapped for cash, face long-term unemployment or have an unforeseen emergency and need cash right away, it’s not and will hurt you in the long-term. Here are a few reasons why you should never raid your 401(k):
If you leave your job after you’ve taken out money from your 401(k), you only have 60 days to repay that loan – whatever the amount is. That can be quite hard if you’ve taken out a large amount and don’t have the savings to replace it. And if you stay at your job and still take out money from your 401(k), you have to repay it in five years, so these aren’t great for really large ticket items since you’ll still have a high monthly payment.
Early withdraw penalty
If you’re under the age of 59.5 year and take out any money, you will be hit with a 10% early withdrawal penalty on your outstanding loan amount. And that’s not even factoring in any federal and state income tax on that money. (There are some exceptions to this, which include people who are disabled or pay for medical expenses that are over 10% of your adjusted gross income.
All of employer-sponsored 401(k)s have their own set of rules that you must follow. Although some of them allow you to take out loans from your retirement fund, other companies do not. Usually, the rules are you can take out a loan on your 401(k) if you are in some type of financial hardship or are a first-time homebuyer.
Can’t get that money back
If you make a withdrawal instead of taking out a loan on your 401(k), you can’t get that money back. And that means less money for your retirement.