Borrowing Against 401k For College – Wise or Not?
Borrowing against 401k account balances can be tempting, and most plans allow loans in a number of situations. The good news is that loans from your 401k are not charged a ten percent early withdrawal penalty, and you will not have to pay taxes as long as the loan is not in default or you do not quit your job before the loan is paid off. Using 401k to buy a house or pay college costs is almost never advised by financial experts though, for a number of reasons. Borrowing against 401k accounts means that there is less money available to earn money for your retirement, and these plans are centered around compounded interest so that your money grows.
Borrowing is better than completely cashing out 401k accounts, and one positive note is that the interest you pay on the loan is paid to your account instead of a lender. College and a higher education may help your prospects for a better career and more financial success, so this is a very worthy goal. Borrowing against 401k accounts may not be the best way to reach this goal though, and you may be better off with a student loan or other financial assistance programs instead. The yearly 401k contribution limits make a withdrawal risky, because you may not be able to catch up in later years due to the limits in place.
Many people think nothing of borrowing against 401k plans, and usually the intention is to pay this money back in no time. If money is tight this may be hard to do though, and if you leave your job before the loan is paid back completely the consequences can be significant. If you stop working for the employer with the 401k plan then any remaining loan balance will be adjusted as income, and this may trigger the penalty and cause taxes to be owed. You should always get 401k investment advice before making any important decisions concerning your retirement accounts and funds.