Clark Howard: Don’t use your 401(k) as a bank

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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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.

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