Most plans allow employees to borrow up to $50,000 or 50% of the amount invested in the plan, whichever is less. And the interest rate is low, compared with rates for other types of loans. It's typically 1 or 2 percentage points above prime. And, you have five years in which to pay back the loan.

Of course, you are in fact depleting money that was set aside for retirement. And, the growth of your 401(k) is directly hampered by the amount you take out. It's easy to overlook this second point.

Equally important is the fact that if you leave your job or if you are fired, you must repay the loan and do so fairly quickly. Most plans insist upon repayment within 30 to 90 days after your final day of work.

What if you don't make that repayment in time? You will be hit with taxes on the outstanding dollar amount.

The pros...

• Your payments are made back into your own retirement account and not to a bank.
• And, these payments are automatically deducted from your paycheck so you won't miss any payments.

The cons...

• The amount you take out reduces both the amount you have saved for retirement and the amount available for tax-free compounding. This is especially true if your employer matches your contributions.
• And the interest paid, unlike that on real estate loans, is not tax deductible.
• You will also be taxed twice on the loan amount. The money you take out is money you contributed to the plan before taxes. But you're paying it back with after-tax money. Then, when you withdraw the money upon retirement, it will be taxed yet again!

More info...

You'll find a wealth of easy-to-understand material at: www.401khelpcenter.com.

STAY TUNED: Next week, IRA loans.

- Nancy Dunnan

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