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What Your 401(k) Loan Is Really Costing You

There it is.
Just sitting there.
Tempting you. Taunting you.
It would be so nice to have.
You could make up for it later. Nobody would need to know.

I understand the temptation. I’ve given in to it before and regretted it. So my advice to you is this: No matter what, don’t touch it!

Your 401(k) savings, that is.

The 401(k) Loan Trend

Borrowing money from your 401(k) has gotten popular in recent years. In fact, more than 26% of 401(k) participants had a loan outstanding in 2014.1 And two-thirds of those people borrowed a second time. And 25% took out a third or fourth loan. That’s a bad habit to develop!

People have given me a million reasons for raiding their 401(k) accounts, but some common themes keep popping up. While these may seem like necessary expenses, they’re not. You should never, ever take out a 401(k) loan, not even in these situations:

1. Home Down Payment

I get it. Home sweet home. A place to hang your hat. Your domain. But think about it this way: If you take out a loan now, you may not have enough money to retire later. You’ll have to sell that dream home to make ends meet.

2. Child’s Wedding

Seriously? You’re willing to put your future in jeopardy so John or Jane can have a fancy wedding? I don’t think so! They might appreciate it now, but they’ll regret it later when they have to take care of you because you don’t have the money to take care of yourself. Help pay for the wedding if you can, but your 401(k) is not a wedding fund!

3. Kid’s College Education

Listen up, y’all: Your kids may or may not graduate from college, but you will retire someday. Guaranteed. Whether you’re ready or not. It’s okay for your kids to work their way through college. Millions of young adults take that route every year. There’s no reason to risk your retirement so Junior doesn’t have to work for his degree.

4. Lifestyle Upgrade

I understand this temptation because I gave into it in my 20s. My wife and I were moving and desperately needed (wanted) new furniture for the new house and a new car for the driveway. I took out money from my 401(k), even though it cost me almost half of it in taxes and penalties. I was young and stupid. If I’d have left that money alone, it would’ve grown to almost $500,000 by retirement. I still cringe when I think about it.

Be confident about your retirement. Find an investing pro in your area today. 

Do you see a common theme? Taking money out of your 401(k) is not a smart decision. You can find options that won’t put your future in jeopardy.

The Dangers of 401(k) Loans

Taking money out of your 401(k) doesn’t give you a payoff, but it can cost you—a lot. The biggest cost to you is the potential earnings. When you take money out of your retirement account, that money isn’t earning any compound interest. And some company plans won’t allow you to make any contributions to your 401(k) until your loan has been repaid. That means you miss out on even more time and compound interest.

If that doesn’t convince you to leave your 401(k) alone, here’s another reason: If you lose your job after you take out that loan, you have to pay back the whole shebang—usually within 60 days! If you don’t, then you get hit with a huge tax bill and an early withdrawal penalty.

Make a Better Choice

A coach once told me, “An excuse is the skin of reason wrapped around a lie.” The reasons people give for taking out a 401(k) loan are camouflaged lies. The truth is that people want the easy way out of money problems. Raiding their 401(k) is easier than getting an extra job, selling stuff, or making sacrifices.

To win in retirement, you have to follow the plan. Open a retirement fund, set up automatic withdrawals from your paycheck, and work toward saving at least 15% of your income. Regularly meet with an investing professional and stay informed about your portfolio.

But no matter what, don’t touch the money in your 401(k)!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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