Sure, a 401(k) loan is a quick and easy way to borrow money, and likely to increase among 401(k) participants.
Dan Lamaute of Lamaute Capital, Inc. tells us that the slumping housing market has reduced the use of home equity as a source of personal loans. The Fed reports that home equity loans fell by $900 million the week ending June 28, and Dan says that individuals looking for money are increasingly pursuing other options such as 401(k) loans.
If you are a 401(k) participant considering this, is this a smart financial move for you to make? It’s not a simple decision. Here are some factors for you to consider:
- Interest on a home equity loan is deductible while interest on a 401(k) loan is not.
- If the funds are retained in the 401(k) plan, the account may earn more as a tax deferred investment than the after-tax cost of the home equity loan.
- If you change jobs, you must repay the loan or could suffer a taxable distribution with a 10% penalty.
It’s complicated, and it’s one of those "kids, don’t try this at home" things. Work it through with a financial planner.