Advantages
of 401k Loan |
Disadvantages
of 401k Loan |
1) No Paperwork: Most plans
allow you to fill out an online form for a loan
application. Others require you to call 1-800 number.
Whatever you choose to do, atleast there is no lengthy
paperwork!
2) You can borrow for any reason you wish. However,
since you are playing with your retirement money,
it better be for a good reason.
3) You will receive your loan amount within a matter
of a few days.
4) You get charged the Prime Rate which is what
banks charge their best credit standing customers.
You will pay Prime Rate + 1%.
5) The prime rate you will be repaying might actually
be higher than the original interest rates you were
receiving from your 401k retirement account. For
example, if the prime rate is 7% and you were only
receiving 5% from a money market instrument, you
are actually getting a better rate of 2% higher! |
- If you default on your loan repayments,
you will have to pay a 10% penalty fee (if you're
59.5 years or less) plus federal and provincial
state income taxes.
- Most plans will charge you a fee for taking out
a loan. The fee ranges from $5 - $100.
- If you take out money from a 401k retirement
account, you will lose all the compounding interest
that you could have earned, therefore diminishing
your future earnings.
- Some 401k accounts require your spouse's approval
for any loan amount.
- The prime rate you will be repaying might also
be LOWER than the original interest rates you were
receiving from your 401k retirement account. For
example, if the prime rate is 7% and you were receiving
9% from a money market instrument, you will be losing
a 2% interest rate thus diminishing your future
earnings. |
