Five reasons you may not want to borrow from your 401-k
http://www.coachmelissa.net/2009/05/top-5-reasons-not-to-borrow-against-your-401k/
May 20, 2009Are you thinking about borrowing against your 401k? With the value of your 401k going down, wouldnt it be better to use it before you lose all of it?
Unless you are facing foreclosure or bankruptcy, you should NOT borrow against your 401k and heres why:
1.The loan is tied to your employment. At some point, you WILL be leaving your employer. It may or it may not be your choice to leave. Regardless of how or when you leave, the loan will need to be repaid.
2.If you dont repay your loan within 60 days of leaving your current employer, the IRS will view the remaining amount due as a distribution (withdrawal). Unless you are at least 59 ½ years of age, you will be taxed at your current tax rate PLUS 10% for an early withdrawal penalty.
3.You pay double taxes. When you make contributions to a standard 401k, the contributions are in pre-tax dollars. When youre repaying a loan, you are using after-tax dollars. When you retire, you will have to pay taxes on the distributions again. Additionally, the interest paid on the loan is not tax deductible, even if you use the money to purchase your primary residence.
4.The borrowed money is not growing. You unplug your investments while you are repaying the loan. This means that you are not paid while your investments increase in value. Stocks are on sale right now. The only way theyll go from here is up. Even though youre paying yourself interest while repaying the loan, the interest rate paid is often less than the rate your investments would have otherwise earned.
5.It is only a bandaid solution. You are essentially trying to solve the problem of having too much debt by once again borrowing the money. While this strategy might work in the short term, you will find yourself back at square one just a few months down the road.
Figuring out how to repay large debt is always difficult. In a bad economy it might seem impossible. That is why it is especially important to recognize the need for professional advice. Many financial coaches and advisors will have an initial consultation free of charge. Once you start working with them, together you will come up with solutions that will work for your particular situation.
If you are facing foreclosure and/or bankruptcy, go ahead and borrow against your 401k. But borrow only the amount you actually need. Otherwise, youre better off finding other ways to repay your debt.
And why you may not want to cash in early.
http://www.articlesbase.com/personal-finance-articles/401k-early-withdrawal-penalty-1274287.html
The 401K early withdrawal penalty is a heavy price to pay, that if at all possible, should be avoided.
This fee is paid when you cash out your account before turning 59 years and 6 months old. You can only do this when you've reached retirement age (in which case there is no fee) or when you've left your current employer. You have a very short amount of time to decide what to do, usually about thirty days. When you leave your job you can decide to leave the money in it's current plan, rollover to your new employers plan, roll into an IRA (independent retirement account), or cash out.
When you cash out the 401K early withdrawal penalty takes a great deal of your accounts balance. There are three different parts that must be paid: federal taxes, state taxes, and a ten percent penalty. The federal tax percentage is determined by your tax bracket, which can be found on your last years tax papers. State tax varies state to state, but is typically somewhere between five to ten percent. When added all together these three parts can amount to thirty to forty percent of the amount you take from the account, plus the money the account would have accumulated up to the point of retirement.
If you need money now and see this account as your only option for funding, there are some circumstances where you can use this money and avoid the 401K early withdrawal penalty.
If you are in a situation of economic hardship, where you will lose your home or have medical bills, you can fill out economic hardship paperwork and apply to get take some money from the account. You do have to repay this money, though.
Some plans will allow you to do 401K loans. You are allowed to borrow from the account up to 50% of it's balance, or $50,000 (whichever is less). You do have to repay this money and pay interest, but the interest rate is low, and the interest you pay is put right into your account, so it's not really a loss. This money does have to be repaid within five years or else it is treated as though you originally cashed out and you have to pay the early withdrawal penalty.
With some plans you are also able to withdraw to use the money to pay for college courses if the classes will further your current career. You'll want to check with your plan provider to see if this is available to you.
Because of these harsh fees, and the loss of your main retirement savings, it is important to avoid paying the 401K early withdrawal penalty.
Mozeltoff! 
