Withdrawal or Borrow from 401k?

Are you considering a major purchase such as a vehicle or new home? Maybe you are looking to pay off your credit cards or make the next college tuition payment. Many people ask if they should take a withdrawal from their 401k to make these purchases or payments. I would never recommend a withdrawal from your 401k unless it was absolutely necessary. If you withdrawal money from your 401k, not only is the money permanently gone, you will pay an early withdrawal penalty of 10% if you are under 59 1/2 years of age. You also have to claim the amount you took out on your taxes as income. This can be extremely costly.

Most employers offer a loan from your own 401k account with a low interest rate. When you make your monthly payments, the interest expense and principal go back into your 401k account. There are a few downsides:

1- If you quit or get fired, you owe the money back immediately.
2- You lose out on potential compounding. For example, if you borrow $15,000 you no longer have that $15,000 in the account making money for you.

Check first with your company to see if any restrictions apply.

If you can, do neither. Try to first pay off your debt with additional money you may have saved or use incoming money. Try to put an affordable payment schedule together to get your debt down. Another choice is applying for a home equity loan. The interest on these are very low right now and is usually tax deductible. Federal tax law allows you to deduct mortgage interest on up to $100,000 in home equity debt ($50,000 apiece for married persons filing separately).

Empyrion Wealth Management (“Empyrion”) is an investment advisor registered with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. Information pertaining to Empyrion’s advisory operations, services and fees is set forth in Empyrion’s current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at www.adviserinfo.sec.gov. The views expressed by the author are the author’s alone and do not necessarily represent the views of Empyrion. The information contained in any third-party resource cited herein is not owned or controlled by Empyrion, and Empyrion does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Empyrion of the third party or any of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner or investment advisor.

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