The real cost of that 401(k) loan

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The real cost of that 401(k) loan
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Borrowing against your 401(k)

It might be tempting to borrow against your 401(k), but have you ever thought of the real cost of that loan?

Some 1 in 5 Americans treat their retirement account like a savings account to draw on at will. Certain 401(k) plans even offer a debit card option for you to borrow against your future. Not a good idea!

I’ve told you in the past about the heavy taxes you have to pay on your money when you tap into it before retirement. But the big cost here is an opportunity one. If the money’s not there, it has no chance to grow and multiply over the years.

New numbers from a research branch of Fidelity Investments illustrate the dangers of dipping into your 401(k). The upshot is that borrowing from your 401(k) once may be a forgivable sin…but doing it even once often opens the gateway to future retirement-plan borrowing. And if you become a serial borrower, it’s disaster for your retirement. 

Some people just accept they won’t be able to ever retire. That’s a choice and there’s nothing wrong with it. But most people want to be able to retire at some point and have leisure time. Borrowing against your retirement plan is a sure way to sabotage your future.

I love the Chilean approach to saving for retirement. The citizens of that country have personal mandatory accounts where 10% of their money is automatically taken each pay period and placed into a retirement account.

Remember, Social Security is really just an IOU from the government — one that is unlikely to pan out for those in their 30s. Speaking of younger folks, when you change jobs, don’t cash out your 401(k) and spend it. Roll it over to your new employer’s plan!

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Clark Howard About the author:
Clark Howard is a consumer expert whose goal is to help you keep more of the money you make. His national radio show and website show you ways to put more money in your pocket, with advice you can trust. More about Clark
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