10 Pros and Cons of 401(k) Loans You Should Know

Amanda from Ohio says, “I’m a long-time Money Girl podcast listener and want to know if you could do a show on taking a loan from your employer-sponsored 401(k) plan. Is a 401(k) loan a good idea if you need quick access to cash, and what pitfalls should you look out for?”

Thanks for your question, Amanda! As the balance in your retirement account at work grows, it can be awfully tempting to tap it. But first, it’s critical to understand what your 401(k) offers and the IRS rules for borrowing from one.

In this post, you’ll learn 10 pros and cons of taking a loan from your 401(k) or 403(b). We’ll cover everything you need to know to understand how these loans work, potential problems to avoid, and tips for making wise financial decisions.

10 Pros and Cons of 401(k) Loans You Should Know

1. You receive funds quickly.
2. You get a relatively low interest rate.
3. You don’t have a credit check.
4. You can spend it as you like.
5. You have a short repayment term.
6. You can’t borrow more than the legal limit.
7. Your payments must be deducted from your paycheck.
8. You must pay non-deductible interest.
9. You miss out on potential market gains.
10. You could have an expensive late payment.

Let’s start with a 401(k) primer in case you’re not familiar with these accounts. A 401(k) retirement plan is one of the most powerful savings vehicles on the planet. Many small and large companies offer them. The 403(b) is similar in most ways but is available when you work for certain non-profit organizations such as churches and schools.

A 401(k) retirement plan is one of the most powerful savings vehicles on the planet.

If you’re fortunate enough to work for a company or an organization that offers a retirement plan, it’s an incredibly valuable benefit that you should take advantage of. But many people ignore their 401(k) or 403(b). They may not understand how it works or mistakenly believe you must be an investing expert to use it.

You elect to have your company deposit a percentage or a flat dollar amount from each paycheck into your traditional 401(k) or 403(b) before taxes are taken out. That’s a nice benefit because you don’t pay tax on contributions or their investment earnings until you take distributions in retirement.

However, there’s another option called a...

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