Also, unlike 401(k) contributions, loan payments are made with after-tax dollars. And the loan payments – which can last up to five years – are yet another expense for your budget to absorb.
“If you take out a 401(k) loan, you’re clearly already short on cash,” said Vickie Adams, a CFP and owner of her own eponymous firm in San Pedro, California.
Worse, if you lose your job, the loan quickly becomes due. If you’re unable to pay the balance, it typically morphs into an early 401(k) distribution and is subject to the 10 percent penalty, along with income taxes.
“You have to be absolutely secure in your job if you take a loan,” Adams said.