by Feature08

Created on: July 23, 2008

While all the famous financial experts rally against it, for a person in dire straits, borrowing from your 401K plan might seem like the only option. Because it doesn't impact your already limited funds, because it doesn't reflect as a loan on your credit report, and since it's your money, it might even sound like a good idea. However, the repercussions associated with borrowing against your 401k plan are so severe that you soon realize that whatever your financial dilemma, you might be better off just suffering through it.

First, you may not be entitled to as much as you think. If you are not vested in your company's 401k plan, you can only access the amount contributed, and after that, only a certain percentage is available for borrowing. Hence, if your maximum potential loan amount is less than you need, it is a good idea to stop before you even start and come up with an alternate plan.

If you are still not convinced 401k loans are a bad idea, consider the issues posed by repayment plans. While it is not such a bad idea to earn money for your self at an interest rate of five percent or more, the fact that your take home pay is reduced by yet another deduction is not so good. As the money is taken directly from paycheck at a set amount, the set amount is taken out regardless of how many fewer hours you work or why.

Not good also, is that in addition to paying the loan back with interest, within a given time frame, are the stringent rules for paying it back. Instead of the option of paying additional amounts when possible, your only means of cutting the repayment short is to somehow come up with enough funds to cover the outstanding balance. Otherwise, you are stuck with the loan and the interest until the specified repayment period comes to an end.

If you were to quit, get fired or find another job while the loan is still outstanding, that only makes the situation worse.

Regardless of the months or years of interest already invested in the repayment plan, an additional ten percent is assessed to the loan amount and this is in addition to the ten-percent that is assessed to the remaining non-loan balance.

And, it doesn't end there. The loan amount is then tacked onto that year's earnings making your tax liability higher than it should be and significantly reduce any refund you had coming.

So, for those tempted to borrow against their 401ks, listen to the experts: don't do it, unless of course, you're fifty-nine and a half.

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