During the financial crisis, many cash-strapped workers resorted to 401(k) loans to make ends meet. But by doing so, they paid a higher cost than most of them realized.
In the following video, Fool contributor Dan Caplinger takes a look at the true cost of 401(k) loans. Although many people like these loans because you're essentially paying interest to yourself rather than to a big bank, Dan points out that the interest you pay to your 401(k) plan ends up getting taxed again when you withdraw it in retirement, creating a double tax hit. More importantly, Dan notes that money you borrow from your 401(k) loses its opportunity to earn returns from investment, which over the past several years has added up to substantial lost profits. Before taking a 401(k) loan, make sure you know exactly how much it could cost you in the long run.
Being smart about investing is an essential part of managing your 401(k), and the best investing approach is to choose great investments and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.
Fool contributor Dan Caplinger owns warrants on Wells Fargo and Bank of America. The Motley Fool recommends Bank of America and Wells Fargo and owns shares of Bank of America, Citigroup, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.