Q & A Borrowing from my 401(k)

Q: Can I tap into my 401k if I’m still currently employed by the same company?

A: Many companies allow you to borrow from your 401(k) account, but that’s usually limited to hardship or down payment for a first time home buyer. Regardless, if you do borrow from your 401(k), you will have to pay it back to yourself with interest (also paid to yourself) via payroll deductions.

That said, I would suggest trying NOT to borrow from your 401(k) account. That money is growing either tax deferred or tax exempt. You want that money to compound and grow for decades, uninterrupted. By pulling money out, you are missing out of several years of compounding.

For instance, (assuming as 7% compounded annual growth rate) if you invest $5,000 a year for 10 years, you would have about $74,000. If you then withdrew $25,000, you would have $49,000… if you then paid yourself back (we’ll assume no interest for simplicity) at $5,000 a year, you might not be able to afford the $5,000 loan payment, plus your usual $5,000 annual payment, so you might have lost that $25K from your compounding forever…

Eventually, after 40 years of working, you would have: $878K — a tidy sum, for sure. But if you hadn’t borrowed money from yourself and left that $25K in your 401(k) to grow, you would have $1.068 million. Just taking $25K out of your 401(k) and missing out on 30 more years of compounding, you would have missed out on almost $200K.

If you have any other option, I suggest leaving the money in your 401(k) and letting it grow, uninterrupted for decades.

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