Should You Tap Your 401(k) Now?

Have you ever taken a loan from your 401(k)?

If you have, you're not alone. A number of studies in recent years have shown that about a fifth of 401(k) plan participants have loans outstanding at any given time. And while 401(k) loans are a once-in-a-lifetime event for some, many other folks treat their retirement savings as yet another revolving line of credit.

Ever helpful, our friends in the financial industry have spotted this trend and responded to it, with products that -- for a fee, naturally -- make taking 401(k) loans simpler than ever. Products like ReservePlus, for example, which in essence designates part of your 401(k) as a revolving line of credit, holding it in a special (high-fee) money market fund for you to draw on at any time, without cumbersome paperwork.

For the ultimate in simplicity, there's even a debit card. Now you can blow a hole in your financial future from almost any ATM machine in the world, with no extra phone calls or cumbersome paperwork required.

Can you tell I'm not a fan?

The perils of 401(k) loans
A while back, I mentioned that spending a few days in a 401(k) call center opened my eyes to the pervasiveness -- and dangers -- of 401(k) loans. Many plan participants -- too many -- have 10% or more (sometimes much more) of their balances out on loan at any given moment. And while that money is out on loan, it's not in the market.

Given the long-term powerhouse stocks that drive much 401(k) investing, taking your money out of the market the way you'd tap a home equity line is just not in most folks' long-term interest. Consider the gains you might have missed over the past five years from taking these perennial blue-chip stars out of your 401(k) portfolio:


Missed Gain per $1,000 Borrowed

General Electric (NYSE: GE  )


Johnson & Johnson (NYSE: JNJ  )


JPMorgan Chase (NYSE: JPM  )


Monsanto (NYSE: MON  )


ExxonMobil (NYSE: XOM  )


Archer Daniels Midland (NYSE: ADM  )


Procter & Gamble (NYSE: PG  )


There's just too much to lose from taking your 401(k) money away from funds that hold stocks like these.

So when should I take a loan?
All that said, the 401(k) loan is a tool that has a place in your financial toolbox. Not a tool to be used casually, for sure -- not for a new widescreen TV or a dream vacation or even a kitchen renovation. But a tool that in certain cases might be the appropriate tool for the job.

Which cases? Simply put, whenever the alternatives, after a full consideration of the costs of the loan, are even worse. If an unexpected major expense has you in a serious hole -- if your house is in danger of being foreclosed on, for example -- then by all means take a 401(k) loan if it's the best option you have. Assuming you're employed, it's a much better option than a hardship withdrawal, and certainly better than losing your home.

But absent an acute emergency, 401(k) loans rarely make sense -- unless the loan is part of a larger approach to addressing chronic problems with your finances. If you're deeply in debt, have a roughed-up credit rating, and are working with a credit counselor to get back on your feet, a 401(k) loan might be the most cost-effective debt-consolidation option available to you. But if the loan is just going to be one more debt on an ever-increasing pile, it's a really bad one to choose. Work on a budget that will keep you spending less than you earn instead, and keep your retirement savings at work for your future.

Even though retirement saving is easier than ever, having expert advice available can help you make the most of your investment dollars, now and later. The Fool's Rule Your Retirement newsletter provides thought-provoking insights from leading retirement experts, coupled with practical tips you can put to work right away to improve returns and live better in retirement. Be our guest for 30 days, with no obligation.

Fool contributor John Rosevear does not own any of the stocks mentioned. JPMorgan Chase and Johnson & Johnson are Motley Fool Income Investor recommendations. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 651790, ~/Articles/ArticleHandler.aspx, 10/21/2016 3:03:49 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,151.83 -10.52 -0.06%
S&P 500 2,141.15 -0.19 -0.01%
NASD 5,254.47 12.64 0.24%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 2:47 PM
ADM $42.32 Up +0.14 +0.33%
Archer Daniels Mid… CAPS Rating: ***
GE $28.94 Down -0.14 -0.46%
General Electric CAPS Rating: ****
JNJ $113.65 Down -1.22 -1.06%
Johnson and Johnso… CAPS Rating: ****
JPM $68.50 Up +0.24 +0.35%
JPMorgan Chase CAPS Rating: ****
MON $101.95 Down -0.91 -0.88%
Monsanto CAPS Rating: ***
PG $84.48 Down -0.45 -0.53%
Procter and Gamble CAPS Rating: ****
XOM $86.71 Down -0.50 -0.57%
ExxonMobil CAPS Rating: ****