By JLP | June 5, 2006
Is it ever a good idea to borrow from your 401(k)? I saw this article in the Charlotte Observer, which offered this “do” advice from Eric Tyson:
Do: Borrow 401(k) money if it is your only means for a down payment on a house or to help pay for college for you or your kids, both of which are investments, said Eric Tyson, author of “Personal Finance for Dummies.”
Although I don’t necessarily recommend it, we borrowed from our 401(k) in order to come up with the down payment and closing costs on our house. When you take out a loan from your 401(k), the funds inside your 401(k) must be sold and the proceeds are loaned to you. You pay back the loan with AFTER-TAX money, which is deducted from your paycheck. In hindsight we borrowed at almost the perfect time as we sold our mutual funds at the market peak and bought them back during the downturn. This meant we were buying back the mutual funds for 15 – 20% LESS than we sold them. For us it was great.
As far as borrowing from a 401(k) to pay for college: I think I would exhaust all other funding sources before tapping a 401(k).
One important thing you need to remember about 401(k) loans: if you take out a loan and leave or get fired from your company, you must either pay back the loan immediately or you will have to pay taxes PLUS a penalty on the outstanding amount, which is definately NOT a good deal.