• Margin loan. If you have a brokerage account, you can borrow from your broker using a "margin loan" arrangement where the holdings in your account serve as your collateral. The interest rate is attractive, generally prime plus 1%. This is also an attractive option because it preserves the tax-free compounding of the money in your retirement plan.
• Life insurance. Money can be borrowed from a whole-life insurance policy. An advantage here is that you're not truly taking on new debt-it's money you have accumulated as a sort of savings in a life insurance product. You're effectively borrowing from yourself, but without some of the nasty side effects of doing so within your retirement plan.
• Have your 401(k) contributions temporarily stopped. Many people forget that they can simply have their new contributions stopped or reduced temporarily. If this will meet your needs, it's probably a better option than borrowing from your current balance.
If you still need to consider a loan from your 401(k), your objective should be to seek a balance between two competing desires-to maximize the return in your retirement plan while minimizing the cost of your borrowing. To do this, you should determine what interest rate would be roughly equal to your projected investment return in your 401(k) over the term of the loan. Since the loan effectively becomes a fixed-rate investment in your 401(k), you should compare the rate you would expect to earn in your plan's bond fund to the rates of interest available via other lending sources. If this interest rate is lower than the loan rates you qualify for elsewhere, a retirement plan loan may be an acceptable choice. Just be careful to weigh all the risks, and if you do proceed, be sure to reallocate your plan holdings to reflect that your loan is now part of your bond allocation.
A loan from your retirement plan isn't always a bad decision. But as we've seen, there are significant drawbacks, so consider all of your options carefully before dipping into your 401(k). Your decision can seriously affect the growth of your retirement savings, or worse.
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