Surprises happen and sometimes, finding the money you need on such short notice can be a difficult challenge. At Black Harbor Wealth Management, we want to help ensure that this will never be the case. Our goal is to help you manage your wealth and grow your assets so surprise medical bills, home repairs, and other major expenses won’t be a problem. However, for individuals just starting their wealth management journey, financial demands can seem overwhelming. When it comes time to pay down a large bill, you have several options, but one option that should always be a last resort is borrowing from your 401(k).

Consider Other Options First

Your 401(k) is the starting point for your retirement. If you’re like many of our clients, you have contributed to your fund for years, trying to save a solid nest egg to cover expenses once you’re out of the workforce. You’ll want to protect your assets in your 401(k) and should only borrow funds after you’ve considered other options. If you’re unsure of what your best option is, contact your advisor. They’ll help you determine the best course of action and may be able to refer you to a qualified local lender.

What Happens When You Borrow

Your plan administrator will determine the conditions of your loan, including the interest rate, payment terms, and the amount you’re allowed to borrow. They’ll take into consideration:

  • Average market interest rate
  • Borrower credit history
  • Amount of money in the 401(k)
  • Conditions of the individual plan

Following the plan administrator’s approval, you’ll receive your loan.

Advantages of a 401(k) Loan

Borrowing from your 401(k), while a last resort, does have two distinct advantages.

  1. For most borrowers, the interest rate assessed on the loan will be lower than other standard loans. This greatly reduces the amount you’ll be expected to repay over the duration of the loan.
  2. Since you’re borrowing from your 401(k), you won’t have to pay taxes on the loan, provided you repay it in full by the end of the loan term. Failure to do so will result in the loan being classified as an early distribution and will subject you to a 10 percent early withdrawal fee on the amount of the loan.

When you borrow from your 401(k), it is important to remember that the amount of return you see on your retirement plan will decrease until the amount is paid back in full. When you remove money from your 401(k), you are taking away from the total amount of investable funds. And while a 401(k) is important in helping you plan for retirement, working with a dedicated financial advisor, like the experts at Black Harbor Wealth Management will help you better plan for your future.

Don’t leave your retirement up to chance. Schedule a free consultation with a financial advisor today and let us help you plan for retirement. Let us help you take the worry out of growing your wealth. And be sure to catch our talk show for more helpful tips on retirement planning and wealth management!