Tuesday, October 16, 2007

The Downside of taking 401K Loans

In the past, I have urged people not to take loans from their 401K plan. Raiding your 401K should be your avenue of last resort. Unfortunately an increasing number of people in the U.S. are taking loans from their corporate 401K plans. The following article outlines some of the significant negatives associated with this activity.

Cash-strapped Americans raiding their 401(k)s
http://www.chicagotribune.com/business/yourmoney/chi-ym-borrowing-1014oct14,0,5181066.story

2 comments:

Katie said...

That's just crazy. I could have sworn people knew not to do that. Oh well...

Darryl in San Jose said...

This article has at least one incorrect statement. I believe that 401K loans have a place in a sophisticated investors portfolio. If your the type of investor who is running Covered Calls on all over you investments and doing stradles, there is a play for a 401K loan that allows you to INVEST the money in a security that is not offered in the 401K that can result in higher returns. I can show examples of someone making a $10K loan, using it to buy APPL stock and at 65 they are much better off then someone who was forced to choice between 4 bad funds in a 401K plan.

Yes it is a BAD idea to take a 401K loan for spending, but it is not always a bad idea to take that same loan for investing.