Loans in a 401(k) plan may be a double-edged sword.

The plan proposed the most complex highway interchange attempted in Ontario to that point. (Photo credit: Wikipedia)

If your situation requires a loan from your 401(k) plan please seek the advice of an objective adviser. The money spent on this adviser could save you much more down the road. Be certain that this is not a band aide and your financial woes will continue. Remember should bankruptcy be necessary in the future the money in your 401(k) plan is exempt.

6. Loans in a 401(k) plan may be a double-edged sword. If you contribute to your 401(k) plan on a pre-tax basis and take a loan from your account, you will be paying yourself back on an after-tax basis. When you retire and distribute your account, you will have to pay taxes again. This double taxation is the double-edged sword of loans.In addition, if you take a loan and are unable to pay it back within the outlined time period, your loan will become a premature distribution, taxable in the year your loan goes into “default,” and may be subject to an additional 10% in penalty taxes. If you terminate employment with an outstanding loan, while your account balance may be eligible to stay in the plan, your loan will default if you cannot pay the amount in full prior to the end of the grace period.

It’s also important to keep in mind that removing your hard-earned money from your 401(k) plan reduces the amount of time that money could be accruing earnings and compounding interest. Please take the time to consider the consequences prior to requesting a loan from your 401(k) account.

Taking a loan from your 401(k) plan should be a last resort option. As desperate as your current situation is, raiding your retirement plan is not in your best interest. You need to protect your future self from your current self.

Please comment or call to discuss how this affects you and your finances.

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