That is a great question! There are some reasons why taking a loan out of your 401k might not be the best option. Before doing so, please consult your plan administrator and be certain to understand the rules for your particular plan.
The first reason is that you may lose the ability to contribute to your fund while your loan is outstanding. Some companies will disallow contributions or matches until the loan is repaid. That can seriously derail your long term growth potential of your plan. Other companies will deduct the loan payments from your check, reducing your flexibility with other payments.
The second reason is that you lose your tax sheltered advantage. The interest that you are paying yourself on the loan (you are both borrower and lender in the transaction) is considered a taxable income by the IRS, and reduces your returns. It's also possible that the opportunity cost of having invested that repaid interest could be more than what you'd make having used it in an investment.
The third reason is that if you were to God forbid lose your job, the loan amount is repayable within 60 days. If that isn't done, you are subject to a 10% penalty on the balance, (if you're under 59 1/2) and are due for whatever State and Federal taxes apply, as it is no longer considered a loan, but an early withdrawal.
An alternative to consider might be a home equity line of credit, if the interest rates and your equity allow. Some things to consider. Again, I'd advise you to speak with your plan administrator and see exactly what your plan rules are. Thanks for asking!
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The first reason is that you may lose the ability to contribute to your fund while your loan is outstanding. Some companies will disallow contributions or matches until the loan is repaid. That can seriously derail your long term growth potential of your plan. Other companies will deduct the loan payments from your check, reducing your flexibility with other payments.
The second reason is that you lose your tax sheltered advantage. The interest that you are paying yourself on the loan (you are both borrower and lender in the transaction) is considered a taxable income by the IRS, and reduces your returns. It's also possible that the opportunity cost of having invested that repaid interest could be more than what you'd make having used it in an investment.
The third reason is that if you were to God forbid lose your job, the loan amount is repayable within 60 days. If that isn't done, you are subject to a 10% penalty on the balance, (if you're under 59 1/2) and are due for whatever State and Federal taxes apply, as it is no longer considered a loan, but an early withdrawal.
An alternative to consider might be a home equity line of credit, if the interest rates and your equity allow. Some things to consider. Again, I'd advise you to speak with your plan administrator and see exactly what your plan rules are. Thanks for asking!