I was told I should consider a 401(k) loan, so I was wondering what a 401(k) and a 401(k) loan is. And what are the pros and cons of a 401(k) loan?
401(k) plans are retirement plans where a portion of your salary is saved, matched with by your employer, and over time can earn interest and allow one to retire more smoothly. 401(k) loans are not a typical lender-borrower loans but rather you accessing some portion of your retirement money to pay of your short-term debts. These loans do not require credit history, and one can borrow upto 50% on their account. The interesting thing is that when paying interest on your loan, you transfer the money back to your own 401(k) account on a tax-free basis. Some benefits include speed, convenience, cost advantage and repayment flexibility. Some drawbacks include leaving your job with unpaid loans, and tax inefficiency.
401k loans are loans that are directly taken from your 401k account balance, or in other words, from your retirement savings account. It is a great way to get cash when you need it and it will help you a lot in the short term. You are allowed to borrow $50,000 or 50% of your vested account balance, but you must make sure to repay the money you have access to restore your 401k plan to approximately its original state as if the transaction had not occurred.
In most cases, the cost of a 401k will be less than the cost of paying real interest on a bank or consumer loan, allowing you significant cost advantage benefits.