Recent Posts

3 Reasons You Should Not Borrow From Your 401(k)

October 12, 2017
planning guidance

rsz_istock-624570012.jpgLife can throw us curve balls. You may run into large medical bills, the unplanned need to buy a car, or even a “once-in-a-lifetime” opportunity. (Notice that I put that one in quotes). You sit down and look at your accounts and see that the largest account that you own is sitting in your company 401(k) plan. Why not take some of your own money? It is your money. Oh good, you can easily borrow your own money and pay yourself back. What a great concept…right? You would rather pay yourself the interest than some bank or credit card company…right again?

Wrong.

The way a 401(k) plan loan works is fairly simple. You designate how much you want to borrow. This is typically limited by the IRS to 50% of the account value or $50,000, whichever is smaller. Your plan will cut you a check from your own money. You will then be required to pay back a part of the note with each paycheck plus interest. The interest rate will be a fair rate based on current rates on other loans. Once you have paid it off, that monthly payment should then convert to a normal contribution like you were doing before you took the loan out.

There are three reasons that to steer clear of borrowing from your 401(k):

New Call-to-action
  1. The potential penalty is too high. While you can borrow from your plan pretty easily (much too easy in my opinion), if you should lose your job you may be forced to cough up the entire loan amount in 30-60 days. After all, if you are no longer working, they have no easy mechanism to get your payments like they did while you were working. If you cannot afford to pay it back it can be deemed a taxable distribution. You may end up owing the tax due based on your tax bracket plus an additional 10% penalty if you are younger than 55 years old. This one potential drawback is usually enough for me to say no to 401(k) loans.
  2. You may miss out on opportunity growth. When you remove the money from your plan as a loan it is no longer invested in the market. While you may think that the only loan cost for you is the interest rate you are being charged, there is another cost that could end up being a much larger expense. If the stock market continues to rise while you have your money “out on loan”, that portion of your 401(k) plan may not rise with the market. Let’s say that you took 3 years to pay the loan back and the market grew by 6% a year. That could cost you an additional 6% per year for your loan. This opportunity growth could actually end up costing you a lot of money.
  3. You could incur double taxation. You are most likely investing money into your 401(k) plan on a pre-tax basis. This means that your taxable income for the year is reduced by your 401(k) contribution. When you pay back a loan, you are doing so on an after-tax basis. This means that your taxable income may be higher in years that you are paying back a loan. That in itself is another cost that you need to factor in. Then, when you eventually distribute the money from your plan, it will be taxed again. This is double taxation: taxed on the way in and on the way out. This is not the most efficient way to invest for your retirement.

So, while it may be tempting to tap your retirement funds, try to stay away. Get yourself in a position now to not have to rely on using your retirement funds until…well…retirement.

United Capital Financial Advisers, LLC (United Capital) provides financial guidance and makes recommendations based on the specific needs and circumstances of each client. For clients with managed accounts, United Capital has discretionary authority over investment decisions. Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained in this blog is intended for information only, is not a recommendation, and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances. This blog is a sponsored blog created or supported by United Capital and its employees, organization or group of organizations. This blog does not accept any form of advertising, sponsorship, or paid insertions. Certain authors of our blog posts may be influenced by their background, occupation, religion, political affiliation or experience. It is important to note that the views and opinions expressed on this blog are that of the owner, and not necessarily United Capital Financial Advisers. As a Registered Investment Adviser, United Capital does not allow any testimonials on their blog, and any comments deemed as such United Capital will remove.

United Capital does not offer tax or legal advice; therefore all articles should not be taken as such. Please consult legal or tax professionals for specific information regarding your individual situation. All referenced entities in this site are separate and unrelated to United Capital. Any references to any specific commercial product, process, or service, or the use of any trade, firm or corporation name is for the information and convenience of the public, and does not constitute endorsement, recommendation, or favoring by United Capital.

  • Adam Vega
  • 5073439643
    Adam Vega, CFP®, empowers high net-worth individuals by guiding them to making informed and measured financial decisions. He specializes in the financial needs of doctors, successful business owners, and aviation professionals.

    Follow Adam Vega On Social Media

  • Byron Ellis
  • 4089286150
    Byron is the Managing Director of The Woodlands, TX division of United Capital Financial Advisers, and a well-known financial educator. In addition to helping families with their financial life management, Byron is a weekly columnist that has the ability to turn complex topics into clear and interesting essays.

    Follow Byron Ellis On Social Media

  • Cary Carbonaro
  • 4098851980
    Cary is a Managing Director of NY/NJ and Clermont, FL. She is a Nationally Known Personal Finance Expert. She is an Ambassador for the CFP Board. Her bestselling book, “The Money Queens Guide For Woman Who Want to Build Wealth and Banish Fear” was listed in the Top 10 of Books that Make You Rich by Daily. She is a passionate female advocate and teaches yoga in her spare time.

    Follow Cary Carbonaro On Social Media

  • Gail Graham
  • 1728393301
    Gail is the Chief Marketing Officer of United Capital and a champion for changing the way financial services meets the needs of people and their families.

    Follow Gail Graham On Social Media

  • Gene Balas
  • 4224920385
    Gene is a portfolio manager in United Capital's Investment Management Department. Gene began his career in 1989 and is a Chartered Financial Analyst with an MBA from Columbia University. His passion outside of work is weightlifting.

    Follow Gene Balas On Social Media

  • Heather Kelly
  • 4102907483
    Heather is the Vice President of Risk Management and a Chartered Financial Consultant at United Capital. She has been in the insurance industry more than 20 years and is a continual student of the industry. She was the first ever young professional to receive the ATHENA Award, that recognizes women in leadership.
  • Heidi S. Hirsh
  • 4710956733
    Heidi Hirsh is a Wealth Manager with more than 20 years of industry experience in Social Security strategy planning. As a Retirement Income Certified Professional® (RICP) she currently specializes in creating retirement income plans for individuals and families in both the pre- and post-retirement stages of life.

    Follow Heidi S. Hirsh On Social Media

  • Jarrod Upton
  • 4186235370
    Jarrod is the AVP of Guidance and Financial Planning at United Capital. He is responsible for developing and advancing financial guidance initiative. Jarrod is a CERTIFIED FINANCIAL PLANNER with a Master of Science in Financial Planning and a MBA from Texas Tech University. Follow him on twitter: @jarrodupton

    Follow Jarrod Upton On Social Media

  • Joe Duran
  • 3886045440

    Follow Joe Duran On Social Media

  • Kathleen Grace
  • 4516059074
    Kathleen Grace, CERTIFIED FINANCIAL PLANNER(CFP®) professional, Certified Investment Management Analyst (CIMA®), is a Managing Director at United Capital. She advises affluent families, Fortune 500 executives, entrepreneurs, and institutions throughout the country on all facets of financial planning, helping them chart a financial course with the goal of lifetime wealth creation. She is also the author of international best-seller, Prince Not So Charming®, a financial planning novel.

    Follow Kathleen Grace On Social Media

  • Konrad Brown
  • 5030478835
    Konrad Brown's professional mission is to help each client spend more time doing what makes their life worth living. As a Wealth Adviser, Konrad works closely with physicians, entrepreneurs, business owners, and families to pair them with financial strategies to achieve the goal of effectively and efficiently preserving their financial security, legacy and lifestyle.The key to providing elite service is fundamentally understanding a client's unique circumstances and tailoring a comprehensive financial plan that may help them maintain their wealth and achieve their financial goals.
  • Robert Wolfe
  • 4152274112
    Robert is a Managing Director and NFLPA Registered Player Financial Advisor. He specializes in the design and implementation of wealth management strategies for professional sport executives, athletes, physicians, and entrepreneurs.

    Follow Robert Wolfe On Social Media

  • Stan Corey
  • 4074171202
    Stan Corey is a Certified Financial Planner™ Professional (CFP®), Chartered Financial Consultant (ChFC), and Certified Private Wealth Advisor (CPWA). His career in financial services spans over thirty-five years. As a sought-after expert, Stan regularly provides financial commentary at national conferences, in print and online publications, and on TV. He has appeared in USA Today, Working Women magazine, MONEY, Northern Virginia Magazine and Good Housekeeping. Stan has published a novel which is a case study on a divorcing couple. You can go to www.divorcedance.com to get more information.
  • United Capital
  • 1648262852
    Our goal is to improve lives. We help people make sound financial decisions aligned with their goals. If you’d like to stay in touch with us feel free to follow us on social media.

    Follow United Capital On Social Media

Byron Ellis

Written by Byron Ellis

Byron is the Managing Director of The Woodlands, TX division of United Capital Financial Advisers, and a well-known financial educator. In addition to helping families with their financial life management, Byron is a weekly columnist that has the ability to turn complex topics into clear and interesting essays.

Follow Byron Ellis On Social Media

investing FinLife
retirement
planning