401(k) Loans

401(k) plans vary, but most plans allow you to borrow the lesser of 50% of your vested balance or $50,000 and pay it back within 15 years, if borrowed for a mortgage, or 5 years, if used for other purposes. You pay interest, usually prime plus a percentage point or two. We don't recommend 401(k) loans because:

  1. If you leave your job, the loan becomes due immediately and may be subject to a 10% penalty if you are under age 59 1/2.
  2. You're taking out money whose sheltered growth and earnings should be compounding tax free.
  3. Interest you pay is not tax deductible if used for personal purposes. A better option is a "home equity loan".