According to a new study from Fidelity Investments, nearly one in four people have a loan against their 401(k) right now. Here are five reasons why you shouldn’t do this:
- You’re likely to reduce or stop your contributions during payback. The Fidelity study says almost half of people who do a 401(k) loan reduce how much cash they stash for retirement while they’re repaying the loan. That’s because they’re struggling to make those payments back.
- The “Hey, I’m paying myself back” rationale isn’t so straightforward. You pay yourself back with after-tax money that then will be taxed again when you retire.
- If you do it once, you may do it again. You have a 50/50 chance of this being a case of wash, rinse and repeat, according to Fidelity.
- The real cost is opportunity. Taking the long view, the stock market has a lot more up years than down years. So if you’re not as invested in the market because you’ve reduced or stopped your contributions during payback, you’re missing a lot of the gain that takes place over time.
- The net effect is less for you in retirement. A 401(k) loan today means an enormous reduction in what you have to live on in retirement. So you’ll either have to work more years to make up for it or live a life that could put you in near-poverty during retirement.
Several years ago, when interest rates were at incredible lows, I was suggesting it might be OK to tap your 401(k) to secure a great mortgage or refi rate. But now I’ve come to a point where I wish you couldn’t get to that money at all. Because the temptation obviously is too great.
– Clark Howard — Save More, Spend Less, Avoid Rip-offs — for the Atlanta Bargain Hunter blog
Consumer expert Clark Howard’s column appears here each Thursday in conjunction with Deal Spotter, a weekly print section in The Atlanta Journal-Constitution. Find more answers to your consumer questions at Clark’s website.