Chapter 8. 401(k) and Other Retirement Plan Loans

It sounds like a great deal: Borrow from your retirement fund and pay back yourself instead of a bank. You get a great interest rate, and the loan doesn't show up on your credit report or affect your credit score.

Plenty of people take the bait. About one in five participants in large-company 401(k) plans has a loan outstanding, according to research firm Hewitt Associates. The average loan balance at the end of 2003, according to the Investment Company Institute, was $6,839.

But borrowing money from retirement plans is fraught with hazards—so many that most people should look elsewhere if they need funds. A loan or, worse yet, a withdrawal from a retirement fund typically should be a last resort, something you do only when you've run out of options.

In Chapter 2, “Your Debt Management Plan,” you read about why saving money for retirement needs to be a top priority for just about everyone. Employers increasingly have shifted the burden of paying for retirement to their workers, and Social Security's future is uncertain.

The vast majority of workers should be looking for ways to boost what they save, rather than figuring out ways to tap their retirement funds early.

If you do decide to borrow from the money you'll need for retirement, though, be sure to read this chapter carefully so that you know what precautions to take.