The Venerable 401(k): A Last Ditch Resort to Obtaining Cash
Everyone knows that regular, planned donations to a 401(k) set up by your employer reaps tremendous financial rewards in the long run, especially in a scenario in which an employer matches donations. But should a 401(k) be used as a way to make ends meet should you have a rainy day?
Experts say no. Last year, nearly 10 percent of America's employees who regularly donated to their 401(k) obtained loans from their plans, borrowing just over $18 billion last year for an average loan of $7,600. A year later, about a third of those loans are outstanding.
Because plan rules allow withdrawals of up to half of the vested amount, and with five years given to pay back loans, it's just too easy to use the 401(k) as a quick cash source. However, the pros outweigh the cons in the long run; the fact that the money no longer is tax sheltered, as well as the lost interest, does not make a very good case for this method of borrowing.
CPAs and accountants should take heed to the advice they give to clients and employers. Explore your options and decide what makes the most sense for your own situation.