People Are Tapping Into Their Retirement Funds for Big Expenses. Here Are the Pros and Cons of a 401(k) Loan

Here's why you shouldn't borrow money from your 401(k).

It's no secret that many people are struggling to make ends meet these days. With the cost of living rising and wages staying stagnant, it's no wonder that so many people are turning to their retirement savings for help. After all, what's the point of having money saved up if you can't use it when you need it, right? Wrong. Borrowing from your 401(k) should be a last resort, and here's why.

Pros of borrowing from your 401(k)

There are a few potential benefits to taking out a loan from your 401(k). For one thing, the interest rate is usually quite low. In fact, most 401(k) loans have an interest rate that is significantly lower than the rates you would find on a credit card or personal loan. This can be a great way to consolidate high-interest debt and save money in the long run.

Another advantage of borrowing from your 401k is that you are essentially borrowing from yourself. This means that there is no credit check required and you will not have to go through a lengthy application process. The money is already yours, so all you need to do is fill out some paperwork and you could have the cash in hand within a matter of days.

The cons of borrowing from your 401(k)

Despite the advantages, borrowing from your 401(k) should be your last resort. There are several drawbacks to taking out a loan from your 401(k) that you should be aware of before making a decision.

For one thing, if you can't pay back the money, the loan will be treated as a withdrawal and you will be subject to income taxes and a 10% early withdrawal penalty if you're under age 59 1/2. In addition, if you leave your job (by choice or not), you may have to repay the loan in full immediately. This could leave you in a very difficult financial position if you're not careful.

Another downside to borrowing from your 401(k) is that you are essentially stealing from your future self. When you take money out of your retirement account, it's no longer there to grow tax-free and compound over time. This means that you could end up retiring with less money than you would have had if you had left your savings alone.

Finally, you can only borrow up to 50% of your account balance or $50,000, whichever is less. For example, if you have $40,000 in your account, you can only borrow $20,000. If your account has $160,000, the maximum you can borrow is only $50,000. There is one exception to the rule. If 50% of your account balance is less than $10,000 then you may borrow up to $10,000. Once you take out a loan, you have five years to pay it back and must make payments at least every quarter. Your employer also may have additional restrictions that can make it more difficult to borrow money from your 401(k).

So should you borrow from your 401(k)? Ideally not. If you're confident that you can repay the loan quickly and without any hiccups, then it might be worth considering -- especially if you need the cash for an emergency expense or to consolidate high-interest debt. However, if there's any chance that repaying the loan could put undue strain on your finances, it's probably best to leave your retirement savings alone. Taking out a loan from your 401(k) can reduce your retirement savings and can have a significant impact on your ability to retire comfortably.