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MANY FOLKS FIND 401(k) and 403(b) loans appealing, in part because the loans are easy to obtain and the interest that’s charged goes back into their account, so they’re effectively paying interest to themselves. But the loans can quickly lose their luster.
Borrowing has two costs. First, a 401(k) loan isn’t really a loan. Instead, the money you’re supposedly borrowing is actually removed from your account, which means you lose out on any investment returns the money might have earned. Second, while the money you originally contributed to your 401(k) plan came out of pretax dollars, you have to use post-tax income to repay a 401(k) loan, including the interest owed. In retirement, when you withdraw this money, you’ll have to pay taxes on these dollars again, so they’re effectively taxed twice.
Still like the idea of 401(k) loans? The good news is, they’re typically easy to apply for, with no credit check required and often no loan application fee. You can usually borrow up to $50,000 or half your account balance, whichever is less, though plans can impose stricter rules and some don’t allow loans. The money borrowed has to be repaid within five years, unless it’s used to buy a home, in which case the repayment period can be longer.
If you leave your employer and don’t promptly repay a 401(k) loan, it’ll be considered a distribution and subject to both income taxes and probably tax penalties. Thinking of changing jobs? You should make a concerted effort to pay back the loan.
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Is the above information accurate about taking a loan from your 401(k) if all your contributions to the 401(k) were to Roth 401(k)? It would seem in that instance your repayments would be coming from after tax earnings as were the withdrawn funds, and there would be no taxes on their withdrawal in retirement. Am I missing something?
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