What You Should Know Before Taking a 401(k) Loan

Opening a workplace savings account is one of the best ways to start saving money for your future. But if you find yourself in need of some extra cash suddenly, don’t let yourself think about tapping into your savings now.

Before you initiate that loan, consider these three things:

  1. It’s not free money; it’s a loan. That means you’ll need a repayment plan, which equals another regular expense. Make sure this doesn’t affect your ability to make ongoing contributions to your retirement account. Borrow only what’s necessary, and pay it back as quickly as possible.
  2. Money you borrow can no longer work for you. It won’t collect potential interest or dividends, or benefit from a rising market. You’ll also lose the ability to make money off of generated interest/dividends, known as compounded growth.
  3. You’re on the hook, even if you leave your job. You’re still responsible to pay back the loan even if you have no steady income. If you default on the loan, you’ll possibly face a 10% penalty if you’re under age 59 1/2, and will owe income tax on the outstanding balance.

Borrow from your retirement account only as a last resort. Instead, build a financial safety net to meet short-term needs.

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About cozbycpa

Heather L. Cozby is a CPA on the South Shore and Cape Cod. The managing partner of Cozby & Company, LLC, Heather has the resources and experience necessary to provide quality professional services on a timely basis and at a reasonable cost. She specializes in tax planning & preparation; audit, review & compilation services; management advisory services; bookkeeping; and accounting. Her unique niche is in working with homeowners’ associations and condominium trusts, advising with rental real estate, and providing outsourced financial consulting for mid-sized companies. She is more entrepreneurial than most accountants, and offers the best of both worlds - providing the services of a larger firm while retaining the ability to connect with her clients on a personal level.
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