I Know It’s a Terrible Idea, but I Really Want to Borrow From My 401(k)

Dear Penny: Need Some Money Advice? Ask Penny!

Kristy Gaunt / The Penny Hoarder

Expensive Penny,

We’ve a pupil mortgage for about $50,000 that we incurred for our youngsters’s faculty bills. Regardless that I do know the reply, I nonetheless marvel if it’s a good suggestion to take a four% mortgage from my 401(okay) to repay the coed loans.

My spouse and I are in our mid-50s, so we may repay the 401(okay) mortgage earlier than retirement. As a result of the funds could be paid again to the 401(okay), we might nonetheless have that cash once we retire. Whereas we might miss out on the funding, we would not have the burden of the coed loans for an additional 20 years.

My different concern is the volatility of the market. I’m nervous about one other crash, however in that case, not less than I’d have used the capital to cut back my debt earlier than dropping it.

-Perplexed

Expensive Perplexed,

I really like that you just admit to figuring out the reply to your query whilst you ask it. However hey, I don’t blame you for asking. We’ve all performed it, proper? If mother says no, ask dad. If the Google consensus is not any, name a good friend simply to make sure.

Let’s go over the fundamentals of taking a mortgage out of your 401(okay) earlier than fascinated with the specifics of your state of affairs.

You’ll be able to borrow as a lot as half the steadiness of your employer-sponsored 401(okay), as much as $50,000, with out penalty. You’ll be able to solely withdraw cash you contributed to the plan, and also you usually should repay the mortgage inside 5 years. If you happen to go away your job, you’ll should pay again the mortgage inside 60 days or take the quantity as a closely taxed distribution.

The fundamentals aren’t too thrilling, and there’s an excessive amount of wiggle room for attempting to justify taking such a mortgage. So I, too, determined to cellphone a good friend: Lillian Karabaic, creator of the “Get Your Cash Collectively” workbook. She promised me loads of opinions on taking a mortgage out of your retirement account. And she or he delivered.

“If you happen to may repay the 401(okay) mortgage earlier than retirement, why would you not simply repay the coed loans as a substitute?” she stated by e mail. “Rates of interest are much less vital than your habits. If you happen to’re contemplating this in any respect, it sounds such as you’re on the lookout for the simple approach out of this debt.”

Since pupil mortgage compensation phrases are usually 10 years, and parental mortgage compensation can’t be prolonged, compensation will take you proper as much as retirement age anyway.

“There’s additionally nothing saying you’ll be able to’t repay that pupil mortgage early by yourself,” she stated. “No have to borrow out of your future self to take action.”

She suggested paying these loans out of your earnings whilst you and your spouse are nonetheless working, quite than borrowing out of your eventual retirement earnings.

Nonetheless not satisfied Karabaic doesn’t like borrowing from 401(okay)s? “I’d quite see you promote your home than take out a 401(okay) mortgage to repay different debt,” she stated.

Yikes, proper?

If you happen to’re involved in regards to the market, she stated to think about reallocating your portfolio to focus extra on bonds than shares, which is a normally good plan as you close to retirement age.

“Don’t borrow from Peter to pay Paul,” she stated, “Or on this case, borrow from your self to save lots of Sallie Mae.”

I hope you’re feeling the load of this peer stress, Perplexed. Don’t allow us to down on the market. As my faculty roommate used to implore earlier than an evening out: Make good decisions!

The inbox is open. Submit a query or ship your worries to [email protected], and I’ll see what I can do to assist.

Disclaimer: Chosen questions and featured solutions will seem in The Penny Hoarder’s “Expensive Penny” column. I will not be capable to reply each single letter (I can solely kind so quick!). We reserve the appropriate to edit and publish your questions. Don’t fear — your id will stay nameless. I don’t have a psychology, accounting, finance or authorized diploma, so my recommendation is for common informational functions solely. I do, nevertheless, promise to offer you sincere recommendation based mostly by myself insights and real-life experiences.

Lisa Rowan is a senior author at The Penny Hoarder.

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