A 401(k) is a retirement plan that is employer funded, or where the employer matches a certain share of an employee’s pre-tax contributions. The employee decides how he wants the funds invested by fund managers.
Funds can be withdrawn from the retirement fund only upon retirement, with but a few exceptions, and then you end up paying 10% early withdrawal penalties and applicable income taxes.
Loans against 401(k) retirement plans are quite popular because:
- The borrower doesn’t have to undergo a credit check since he is in effect borrowing his own money.
- You can usually borrow up to half the amount in your account.
- The application process is easy.
- The funds are usually available within about a week.
- The interest rates are generally very low.
- If you should default on the loan, it is not reported to the credit bureaus.
You should only put your retirement funds at risk after you have considered all other options. Do not misuse the loan money on daily expenses or for luxuries. Make sure that whatever you are borrowing the money for is a productive deal.