What is a significant disadvantage of taking a loan from your 401(k)?

What is a significant disadvantage of taking a loan from your 401(k)?

• A. It increases your retirement savings if repaid
• B. You incur penalties if not repaid on time
• C. It guarantees higher returns
• D. It allows unlimited contributions

Answer: (B)

Taking a loan from your 401(k) can be enticing as it offers access to your retirement funds without triggering taxes immediately. However, one significant disadvantage comes into play if the loan is not repaid on time. If you fail to repay the loan according to the agreed terms, the outstanding amount is typically treated as a distribution from your 401(k). This means you would face income taxes on the distribution, and if you are under the age of 59½, you would also incur a early withdrawal penalty of 10%. Consequently, this combination of taxes and penalties can significantly impact your retirement savings. It underscores the importance of carefully assessing your repayment ability before deciding to take a loan from your 401(k).

Taking a loan from your 401(k) can be enticing as it offers access to your retirement funds without triggering taxes immediately. However, one significant disadvantage comes into play if the loan is not repaid on time. If you fail to repay the loan according to the agreed terms, the outstanding amount is typically treated as a distribution from your 401(k). This means you would face income taxes on the distribution, and if you are under the age of 59½, you would also incur a early withdrawal penalty of 10%. Consequently, this combination of taxes and penalties can significantly impact your retirement savings. It underscores the importance of carefully assessing your repayment ability before deciding to take a loan from your 401(k).