A majority of the population does not need a 401k retirement plan. That said, some people are convinced that these things are not tax traps and that somehow everything will work out OK.
If you just can't bring yourself to ditch your 401k, that's OK. You can get something out of it by just leaving it alone. Don't go borrowing money from it. Even if you qualify for the so-called "hardship" provisions, leave it be.
The reason for this is that if you cash out your 401K, you will pay taxes, and a penalty, and that won't be fun, but it's a one time hit. When you take a loan against your 401K, that's the penalty that keeps on giving. First, you give up the earning potential of the money inside the plan, because these "so called" loans are actually a withdrawal of funds out of the plan (on a tax-free basis).
Most fixed-type investments are debt instruments. They are loans. Examples of this would be T-bills and bonds. In reality, you are lending either the Government or a corporation money in exchange for interest plus your principal after the term of the loan.
However, when you loan money to yourself from your 401k, you are simply replacing the interest you would have been getting from either an investment in another company or from bonds. Since the money is not in your account, you're just getting the interest based on what you pay back into the plan. You've effectively swapped the source of interest, not added to it.
Unfortunately, the consequence of withdrawing funds from your 401k plan as a "loan" means that the interest you pay is after-tax. The more loans you make, the more money will be subject to double taxation later when you withdraw the money during retirement.
Every time you take a loan from your 401k plan, you repeat the process of building up funds that will be taxed twice. This is incredibly unfortunate and necessary. The gimmick of the plan (the tax savings) can then become nullified through even moderate borrowing throughout your lifetime. This is on top of the regularly required taxes on distribution.
If you just can't bring yourself to ditch your 401k, that's OK. You can get something out of it by just leaving it alone. Don't go borrowing money from it. Even if you qualify for the so-called "hardship" provisions, leave it be.
The reason for this is that if you cash out your 401K, you will pay taxes, and a penalty, and that won't be fun, but it's a one time hit. When you take a loan against your 401K, that's the penalty that keeps on giving. First, you give up the earning potential of the money inside the plan, because these "so called" loans are actually a withdrawal of funds out of the plan (on a tax-free basis).
Most fixed-type investments are debt instruments. They are loans. Examples of this would be T-bills and bonds. In reality, you are lending either the Government or a corporation money in exchange for interest plus your principal after the term of the loan.
However, when you loan money to yourself from your 401k, you are simply replacing the interest you would have been getting from either an investment in another company or from bonds. Since the money is not in your account, you're just getting the interest based on what you pay back into the plan. You've effectively swapped the source of interest, not added to it.
Unfortunately, the consequence of withdrawing funds from your 401k plan as a "loan" means that the interest you pay is after-tax. The more loans you make, the more money will be subject to double taxation later when you withdraw the money during retirement.
Every time you take a loan from your 401k plan, you repeat the process of building up funds that will be taxed twice. This is incredibly unfortunate and necessary. The gimmick of the plan (the tax savings) can then become nullified through even moderate borrowing throughout your lifetime. This is on top of the regularly required taxes on distribution.
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