Wednesday 19th of December 2018

Your Mortgage and 401k

When it comes to retirement plans and saving money for the future, you literally have thousands of different options. The one option almost everyone takes advantage of is their 401k plan through an employer. A 401k retirement plan typically involves moving a small portion of each paycheck you earn into an account where money can accumulate tax free. Some employers will even match whatever you put into your 401k, giving you double the savings. It’s easy, convenient, and eventually adds up to thousands of dollars. On top of the great benefits a 401k plan has to offer, you can even borrow from the account before you retire.

401k Loans

While the idea behind a 401k loan is to help support your retirement, there may come a time when you simply need the money earlier. With your employer’s approval, you can take out funds from your own 401k plan that’s not subject to taxes. Typically, you’re allowed to borrow half of whatever you have in your 401k, up to $50,000. In most cases you have a full five years to pay back the balance, although it may be extended if the funds are used for a home purchase, which is just what many people do.

Your Mortgage and 401k Loan

Using a 401k to help pay on your mortgage or add to a down payment may be a tempting option for some people. You’re only borrowing money from yourself and any interest you pay will go back to you once it’s all paid off. You’ll also save money over a standard loan as 401k loans aren’t subject to taxes. However, there are some major risks involved with a 401k loan that you should be aware of before borrowing.

  • As you know, you’re borrowing this money from yourself and your future retirement savings. If you borrow too much or can’t afford to pay it all back, you may not be able to retire early or live comfortably when you eventually do.
  • The other potential problem with a 401k advance is that it is highly dependent on your employment. Should you lose your job, you’ll have to pay back the entire balance in a short period of time, often less than 2 months. If you fail to pay back the loan within the time frame, you could be subject to several expensive fees and penalties. These fees can cost hundreds of dollars, that’s money taken away from your retirement.