Your 401k account is not and should not be treated as an ATM. The money you put into your plan each pay period is a gift to your future self. If you are considering taking a loan from your 401k here are a few things to understand:
1) The “ATM” fees are high
Most plans charge at least $50 to take out a loan making it an expensive way to access money especially when you consider the tax cost mentioned below.
2) It’s hard to take a bath when the drain is open
Think of your 401k and other retirement accounts as a bath tub and your goal is to fill the tub before your last day of work. Taking a loan is the equivalent to opening the drain. As water leaks down the drain you will be forced to pour more and more water into the tub to continue filling it.
3) Tax me once shame on you, tax me twice shame on me….
It is often rationalized that when you re-pay the loan you are paying interest back to yourself. This is true. However…..the loan repayment is with after tax dollars. As an example if your loan repayment for a given pay period is $100 and you are in a 25% tax bracket. You have to earn $125 and have the taxes withheld to net out the $100 that will go back into your 401k plan. Shame on you.
What makes matters worse is that when you pull money out of your 401k in retirement the withdrawals are taxed as income. That’s tax #2. Shame on me!
401k loan provisions are meant to be an absolute last resort for emergency cash. You should consider all of your other assets (checking, savings, non-retirement investments, home equity lines, life insurance cash values, etc.) before taking a loan from your plan. If you have a question about your 401k, call us or talk to your Plan Administrator.
* * * * *
As a Family Wealth Advisor, Chris assists select business owners, executives, and affluent families in the areas of estate planning, business succession planning, and wealth management. In addition, Chris serves as the firm’s corporate retirement plan specialist and helps companies recruit, retain and motivate talent by consulting with them on the design, implementation and administration of 401k, defined benefit and executive compensation plans.
Chris has been providing financial planning to families and businesses for 11 years. He recently joined PSG, in September, 2013. Prior to joining PSG Chris worked as a Financial Advisor with Signature Financial Partners, LLC. Chris graduated from James Madison University with a degree in Finance and in 2005 completed the Certified Financial Planning program at Georgetown University. Chris holds the designations of Certified Financial Planner (CFP®) and Accredited Investment Fiduciary (AIF®). In addition he has his FINRA Series 6, 7, 65 & 63 registrations as well as his Life and Health license.