by Jeannette Payne

Created on: May 09, 2011   Last Updated: May 11, 2011

There are a number of different places where loans are available but some are better than other. The 401k offers you a way of borrowing against your retirement funds in the form of a loan while not putting yourself into debt with a lender. It is almost like being in debt with yourself, except with someone else managing it.

There are many advantages to borrowing against the 401k. This might be the reason by so many people are choosing this option. There are no credit checks, and the interest that is being paid, goes back into the fund. These are only two of the advantages and the list goes on. However, you must remember that there are also the disadvantages to consider.

Loss of Investment

Possibly one of the biggest disadvantages of borrowing money from your 401k is that you will be losing a part of the investment. The 401k works as a retirement investment and serves to earn you interest dollars. By taking out money, you are removing a part of the money that can collect this interest, therefore earning less.

The amount of interest that you lose will depend on the amount of money being borrowed and the length of time it takes to pay it back. Most loans are to be paid back within five years but for the purposes of purchasing a house, the term may be longer.

Loss of Retirement Funds

It is not just an investment that you are possibly losing out on, but also funds for your retirement. Money is harder to obtain these days and even more difficult when you are retired. Many individuals have to take up a part time job to survive. The 401k is supposed to assist you by giving the funds that you need to stay retired. Borrowing money from the 401k defeats this purpose to a certain level.

On another note, you can’t pay more into this fund until you repay the loan. If you have the loan out for five years, you cannot contribute for that entire time. This reduces the amount of retirement by a great percentage.

Loss of Money on Taxes

When you are paying back the money that you have borrowed from the 401k, you are paying with money that has already been taxed. After you start taking out your 401k funds at the time of retirement, you have to pay taxes on the money as if it were income. This means that you are paying twice the taxes and can amounts to hundreds or thousands of dollars.

Less to Live On

The money for the 401k repayments is generally taken out of the paycheck automatically. Whether or not you have enough money to pay your other bills, this money is coming

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