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Financial setbacks may have you tempted to borrow money from your 401(k), especially because banks and other lenders have made it harder for you to borrow money by tightening up their lending standards. If you participate in a 401(k) plan, you may be able to borrow up to $50,000, or half of the balance in the plan (whichever is less). But that doesn’t mean that option is right for your situation.
Take the following into account before borrowing from your 401(k):
Given the chances of potential penalties, taxes and decreased saving opportunities, does it ever make sense to take a loan from your 401(k)? After all, interest rates on these loans are reasonable, perhaps half as much as what a bank might charge you for a personal loan.
If your cash flow is really tight and you are making big payments on debts with high interest rates, using a 401(k) loan may take some pressure off your monthly payments. Consolidating several high-interest rate debts into one lower-rate debt is one of the primary reasons workers take out 401(k) loans.
Always keep in mind, however, that the primary purpose of your 401(k) plan is retirement savings, not borrowing. Instead, consider these alternatives to a 401(k) loan: