Tapping into your retirement savings is not something that you want to do, no matter how poor your current financial situation is. Most financial advisors who have studied the 401 (K ) loan basics in-depth, advise that when you borrow these loans it is usually not profitable in the long run. Yet, most people are not deterred by such warnings.

According to 401 (K) loan basics, you can borrow up to almost 50% of your funds or up to a limit of $50,000 for a duration of 5 years. The funds are not really withdrawn, only borrowed, and this makes the loan free from taxes. You can repay this loan slowly. Interest rates are minimal and much less than what you would have to pay in case of consumer loans. It is interesting to note that unlike the traditional loans where interests are paid to a bank or to a lender, here the interest goes to your own account. So, you end up paying yourself for using the money.

401 (K) loan basics – Reasons to Avoid Them:

• To start with, critics argue that the repayment costs are usually much higher than the original contribution. The main concept behind the 401 (K) loan is that you borrow from your own funds but when you have to repay this money, the purpose is defeated. You have to pay back with after-tax money.
• Many of the 401 (K) plan provider companies will not allow you to make new contributions to your account until you have repaid the loan you had borrowed earlier. So, all the money that you are actually saving up is basically repayment.
• When you borrow money from your own account, you will not earn investment returns. These are missed earnings that should be balanced against the break you get for giving yourself money at low-interest rates. People assume that the loan is cost-free because you pay interest back to your account, but according to Twining, the CEO of Financial Plan Inc., you are forgetting an “opportunity cost” that is equal to growth lost on borrowed funds.
• In case your finances worsen more, you could end up losing more money. It is expected that once you take the loan, you will make the repayments on time and without much hardship. Almost 90% of borrowers can successfully do this. But, in case you fail to repay the loan, the financial implications are worse. A default will convert the loan into withdrawal and then the outstanding loan amount then becomes subject to income taxes.
• If you lose your job or quit you are provided with a specific time within which that repayment must be made. You will probably have to repay the loan amount due within five years or even less. When you fail to repay, the loan becomes a withdrawal and subject to income tax penalties.
• By borrowing, you basically lose an important financial cushion. These assets should not be touched because these may be the last assets you have to escape from a financial disaster someday. By exercising this nuclear option, you are actually calling for more trouble in the future.
• When you get into a habit of using the 401 (K) loan every time you are in trouble, you slowly have nothing left for your retirement. By borrowing from your retirement savings, you are actually selling off your assets. If you take money to support a lifestyle that you cannot actually afford, it is worrisome and you should rethink your lifestyle and spending habits.