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Column on 401(k) Borrowing

By Terry Savage on March 28, 2016 | Financial Planning / Retirement

Good Morning….Being a lifelong Chicago resident I have always enjoyed your sage advice on financial matters on TV, in print, seminars etc. In your recent Tribune article on 401(k) borrowing you appear to view as “negative” either voluntarily or involuntarily leaving a job with an unpaid 401(k) loan. I somewhat understand your thinking if someone is under 59 1/2 because of the 10% penalty but if someone over 59 1/2 becomes unemployed and cash is tight, receiving a 1099-R for let’s say $5000 that might be taxed at 15% ($750 at tax time) vs. coming up with $5,000 to repay the loan seems to me to be a better alternative. Isn’t the loan default in this circumstance the same as taking a taxable distribution from the 401(k) Plan…or am I missing something? Thank You

Terry Says:  What you’re missing, and what the borrower will be missing is his/her retirement account in the future.  Don’t we all wish we could borrow from our future Social Security?!!  Of course we can’t.  (The government is doing that for us!)  The whole point is not only the tax penalties and taxes paid on the amount of the loan if it is not repaid — but the loss of all future growth, and compounding of that growth, tax-deferred if the money is not returned to the account.

Yes, dire times call for dire measures.  But the true costs of borrowing from a retirement plan are far more than they appear at first look!



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