The Good, The Bad & The Ugly about 401k Loans

Today I want to talk about the good, the bad and the ugly about 401k loans.

But first, the real question is, how do you as a 401k or 403b participant become a 401k superhero to your future self?

That is the question and these videos will give you the answers. I’m Jonathon Schultheiss and welcome to the becoming a 401k superhero videos.

Lately I’ve been getting lots of questions about 401k loans. So much so that I thought it might be good to take a second to discus them.

Let’s talk about the good, the bad and the ugly.

First the good.

When you take a 401k loan you are actually borrowing your own money. There are no credit checks, or credit approvals. The interest that you pay on this loans goes back to you.

So you are paying yourself the interest. And as long as you pay the loan back in full, you pay no taxes on the loan. So not bad, right?

Now for the bad. When you take a loan, that amount of money is taken out of the market and is no longer growing at a market rate.

Plus when you make payments on the loan, you are making those payments with after tax dollars and when you withdraw the money at retirement. Guess what? You get to pay taxes again on it.

And now, lets talk about the ugly. What happens when you are terminated from your company and you have an unpaid loan?

You have to pay income tax on that unpaid portion, and if you’re under 59 ½, you’ll have to pay a 10% penalty.

This could be a big shock if you’re not planning for it.

And the ugliest of all, if you take too much of a 401k loan and your payments eat up the majority of your paycheck, it’s VERY hard to stop those payments.

You see, your employer is legally obligated to collect those loans from your paycheck under the laws that govern retirement plans. This could leave you in a tough financial situation.

Avoiding 401k loans unless they are necessary is a great idea. This will allow you to avoid issues and potentially have more at retirement, helping you become a 401k superhero to your future self.

Have questions about a loan? Click on the link above and schedule a time to connect about your 401k or 403b plan.