Why? Well, it might be considered a taxable event and, worse yet, it may be subject to a 10% penalty in addition to your normal tax bracket rate. By way of example, if you are in the 22% Federal Tax bracket and fail to pay back $10,000 worth of your loan, you could end up owing $2,200 in Federal Taxes, plus an additional 10% penalty of $1,000 if you are younger than 59.5 years of age. That $3,200 is quite a bit of taxes to owe for access to your money.

Here are some pros/cons of borrowing from your 401k (provided your 401k plan permits loans):

Pros

I pay interest back to myself (and not to a lender);

I have 5 years to pay back the borrowed money (and even longer if borrowed for a home); and

You can borrow up to $50,000 or 50% of your vested account balance.

Cons

My contributions to my 401k plan during my payback period may be limited or not allowed (also, matching employer contributions may be adversely affected as well);

Your 401k account balance will most likely be smaller at retirement; and

Acceleration of your note balance will occur if you quit your job or are laid off during the repayment period.

Sometimes, a loan from your 401k seems like your only option. But, before doing so, you may want to contact a financial planner (www.mynmfp.com/new-clients) to discuss what other options are available, e.g., do you have a Roth account that has been open for more than 5 years? For additional information about this topic, please click on the title above.