During times of crisis, like the one we have at hand, is it really a bad idea to take a 401k loan? It's repaid with interest -- so I would think that would be a better option than taking on 3rd party debt. Thoughts?
Hi @Theodora! Such a great question! The coronavirus relief bill that the Senate is currently voting on would make 401(k) loans a way better option than they usually are. Basically, it would give you an extra year to pay back the loan and let you borrow double what you usually can ($100K max instead of the usual $50K max), provided that the loan is related to COVID-19 income loss or illness.
The bill would also waive the 10% penalty you usually pay if you withdraw the money outright instead of taking a loan if you take out $100,000 for coronavirus-related expenses. You'd still owe ordinary income tax on the money, but you could spread it out over three years, rather than owing it all for the tax year you take it.
The big drawback, though, is that the market is still down significantly. So you'd be taking money out before the market has recovered, which could mean you miss out on a lot of growth.
If the alternative is a loan with mega-high interest rates, like a payday loan or cash advance, a 401(k) loan is probably going to be a better option under any circumstance — but even more so if the rules change for those struggling due to coronavirus.
Stay tuned... I'll update you once we see what's in the final bill.
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