Today’s post is a link to an article I wrote, which was featured on the front page of The Dollar Stretcher. I discussed the topic of taking out a 401k loan — when it might make the most sense and when it is something you should avoid.
I’m including an excerpt below, but definitely check out the full article by clicking here.
Q: What are the main considerations someone should think about when deciding whether to use a 401k loan for home repairs?
DistilledDollar: Understand the full implications of taking out the loan. I’ll walk through the potential value you can access and what the loan terms will look like, including repayment.
Unlike a personal loan or a mortgage, a taking out a 401k loan is taking a loan out against the value of your own assets located within your 401k.
The amount you can withdraw might depend on your individual plan, but the general guideline is that the amount of the loan can be no greater than either:
- A) $50,000, or
- B) 50% of the value of your 401k
As an example, if your 401k has a balance of $80,000, you can take out $40,000 at most as a loan. If your balance is greater than $100,000, then you are limited to a $50,000 loan.
Repayment terms for a 401k loan involve at least a quarterly payment and the term will typically be for five years. Again, each employer may have differing periods, so always check to see how their options might differ.
To read the rest of the article, check it out by clicking here.
As you can see, this article is a bit more technical. Sadly, much of the online content talking about people taking out 401k loans seem to end in disaster, so I urge strong consideration prior to borrowing against yourself. Obviously, the safest course of action, specific to home repairs, is to have an emergency fund ready to go.
In our case, we don’t carry much of a cash buffer since we rent (don’t need cash on hand for home repairs) and prefer a bit more of an unconventional approach to our emergency fund.
Share below if you have or know anyone that’s taken out a 401k loan. Did it work out smoothly? Did you know you could take out a 401k loan to begin with?