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Why You Shouldn’t Take Out a 401(k) Loan

Written by:

Christie Petersen

Edited by:

Kristin Marino

Updated on November 10, 2022

When it comes to taking out a loan your most common option is to apply for one through a lender. It seems though that now more people are turning to their 401(k) for a loan as well. It’s understandable as this isn’t a typical loan since you don’t really need to apply for it or explain why you need it.

One retirement report via Daily Finance found that about $70 billion were withdrawn from retirement accounts every year. From using it to cover housing expenses, to debt, to college tuition, to a vacation, the loans were common amongst those with varying financial issues.

Now that you know why and how much people are taking out, it’s time to find why it’s not such a good idea. The reality is that you’re stealing from yourself, that is, your future self. Not only that but if you’re under the age of 59 you’re also going to have to pay back the loan within a set amount of time lest you want to pay income taxes on it and a withdrawal penalty.

USA Today further explains why a 401(k) loan is not such a good idea. If you’re in serious need of a loan consider using a personal loan to cover those expenses. Also create a budget and emergency savings plan for covering expenses like housing and a vacation. If you’re in debt you may want to consider using a debt consolidation loan or enrolling in a credit counseling program to get your debt in control. A 401(k) loan should be your absolute last resort, always keep in mind that saving for retirement is a necessity.

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