The ability to borrow from a 401k plan is a pretty standard feature. Originally it was thought that providing some way for participants to access their money before retirement was desirable to encourage participation.
1⃣ While you have the borrowed money you are losing growth on that money. Over time this can cost you thousands of dollars in retirement assets. Let’s say your loan interest is the prime rate which is common. That interest rate is currently 3.25%. That’s the earnings on your loan (your money). On the other hand, if the money stayed in the plan, you would likely earn 6-8% or more.
2⃣ You are paying interest on the loan with after-tax money. When you make a withdrawal later in your career you will pay ordinary income tax on the interest you paid to yourself. It’s considered income to the plan and thus to your account
3⃣ You may pay a fee to initiate the loan
4⃣ If you leave your employer before the loan is repaid, you will have a limited period to repay any outstanding balance. If you don’t repay, the balance will be considered a withdrawal. If you are under 59-1/2 you will not only pay regular income tax but also the early withdrawal 10% penalty.
5⃣ While you are repaying a loan you may decrease your 401k contributions thereby further lowering your retirement savings
Your 401k is a retirement plan, a pension plan. It’s not your cash reserve, not your savings account and not your personal ATM. Misuse it and you will pay dearly in retirement. Borrowing from your 401k is like taking home equity loans to maintain a lifestyle and we all know how that turned out.