Debt Articles Retirement Funds

401(k) Loans Rising to Make Ends Meet. Spells Big Future Trouble for Consumers.

The bad news is out, more people are raiding their 401(k)s for cash to address current financial needs.

While the ability to reach into a 401(k) might be perceived as a good thing, after all isn’t it our own money, it’s not.

When you steal from your 401(k) you are really taking money from your 81 year old self who will need it, and maybe even just to be warm and fed.

The Wall Street Journal is reporting today that in 2010 about one in seven workers took money from their 401(k) retirement accounts. That number is up from 2009.

The loan can stand only as long as you are employed by the company. Lose your job, and the full balance is due, within 60 days, or it is counted as an “early withdrawal,” and the borrower will have to pay income tax and a 10% penalty on the balance if he or she is younger than 59½.

“A loan from your 401(k) has the potential to leave deep, deep wounds,” says Thomas Muldowney, a financial adviser with Savant Capital Management in Rockford, Ill.

If it is available, a home-equity line of credit may be a better option: the rates are a little higher, but the interest may be tax-deductible, and it isn’t tied to the borrower’s employment. – Source


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Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

4 Comments

  • It’s the age old problem of hyperbolic discounting. People place too much weight on events happening right now than later and instead make unwise decisions about their money.

  • This is truly sad but not surprising.  I always counsel my clients against taking a 401(k) loan and/or cashing it out.  There have been very very few instances when a small loan made sense in certain given circustances.

    Social Security coffers are dwindling at an alarming rate.  People are living longer and longer.  Your 401(k) and other retirement monies are for your future.  In my bankruptcy practice we are always looking for ways to councel our clients to save money for their retirement years.

    Great point Steve – How are you going to be warm and fed when you are older??

  • This is truly sad but not surprising.  I always counsel my clients against taking a 401(k) loan and/or cashing it out.  There have been very very few instances when a small loan made sense in certain given circustances.

    Social Security coffers are dwindling at an alarming rate.  People are living longer and longer.  Your 401(k) and other retirement monies are for your future.  In my bankruptcy practice we are always looking for ways to councel our clients to save money for their retirement years.

    Great point Steve – How are you going to be warm and fed when you are older??

    • It’s the age old problem of hyperbolic discounting. People place too much weight on events happening right now than later and instead make unwise decisions about their money.

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