A 401k loan may sound strange. It seems contradictory to the reason why you got a 401k plan, in the first place. But odd as it may seem, it is allowed under particular circumstances.
One of the situations that is accepted as a valid reason to make a 401k loan is for education. If you need to pay for your spouse’s, your children’s or your college tuition or higher education expenses, you might be allowed to borrow from your plan.
If you have financial needs that are crucial to your having a place to live in, there is a chance that you will be allowed to take out a loan from your 401k plan. For instance, your mortgage bills have piled up so much to the extent that you are in grave danger of being evicted from your one and only home. Also, if you are buying a house for the first time and you need to place a down payment on your new home, you can use a loan from your plan to fund this requirement.
Medical expenses are significant financial requirements that need to be addressed immediately. If you have some un-reimbursed medical expenses that you need to pay, you can seek a hardship loan from your plan.
If you have decided on getting a 401k loan, talk to your plan administrator to start arranging for it. Since you are borrowing your own money, interest rates on this type of loan are very minimal. Another good thing about this loan is that the interest you pay on the loan will be returned to your account.
On the other hand, there are also some negatives to loaning from your plan. Compared to other types of loans, you only have 5 years to return the money. But the major issue is that you generally won’t be allowed to contribute to your 401k until your loan is completely repaid. If your plan includes an employer match contribution, you will miss out on the free money from your employer until you have fully repaid your loan. So, make sure that your reason for making this loan is a truly valid one.
Financial experts, in fact, discourage people from making a 401k loan, since it means borrowing from your retirement savings that is supposed to be kept intact and should be the one to keep you financially secure in the future. But if you do not have any other means to answer your urgent financial needs, then you can really consider loaning from your plan.