Is borrowing from your retirement savings a good or bad idea? According to our Money Watch Q & A expert, Doug Nelson of TCI Wealth Advisors, it depends on how you plan to use the money.
Nelson says if you plan to take out a loan and repay it within five years, then borrowing from your 401K might be a good option. It does not require a credit check. However, if your purpose for pulling the money is for something more long-term, he advises against it. Nelson says penalties will start adding up if you do not pay back the loan before the allotted deadline. If you are using the money for buying a house, the deadline is often extended.
If you take a loan out and leave your company, Nelson says you typically have to pay back the loan immediately or within six months, otherwise it will be considered a distribution and you will be taxed accordingly.