Taking a loan out from your 401K fund(s) is a possibility. 401K plans were never actually designed to function the way they have evolved to. Initially, these plans became prominent because they cost employers considerably less to contribute to than pension programs with defined benefits. They were designed to act as supplementary income to retirees; not be be the entire replacement for tradition pension plans. Today, our 401K plans continue to offer versatility as parts of our overall retirement strategies.
Can I borrow money from my 401K plan to use in investing?
The answer is yes, but there are conditions that apply and other things to consider before you jump on the loan train. Most importantly, you have to remember that 401K plans came to be standards of employer offerings to save them money as compared to providing pension plans. They were not designed to cater to the needs of the employees that hold the accounts.
Borrowing Money from Your 401K Account:
The majority of 401K plans do allow loans to be taken against their accumulated values. Also, conveniently, as an employee with a 401K plan in effect, you are permitted to have your loan payments automatically deducted from your paychecks. There is a $50,000 loan cap in place by federal law. It can be exceeded only if you have accumulated more than $100,000 in your account. In some cases, there are also minimum amounts that you must borrow, if you choose to borrow any at all.
Law also required these loans to accrue interest at fair market rates, so they will not be interest-free – even though you are borrowing your own money. Beautiful right? Maximum terms on 401K loans are set at 60 months (5 years). Of course, you may elect a shorter loan term, but nothing longer. There is an exception: if you are borrowing from your 401K to purchase a primary residence for yourself. These loans may be taken for terms of up to 25 years in many cases.
Investing with money borrowed from your 401K:
So you see, you are (most likely) permitted to borrow from your 401K, for investing in any of the following:
- Stocks and bonds;
- A new residence;
- Annuities and life insurance;
- Hedge funds;
- and any other type of investment you may choose…The key is to remember that these 401K loans are not interest-free. Of course, there will be specific conditions set for your particular 401K plan. Take your time to weigh the actual long-term costs associated with the 401K loan you may be considering. A better idea is to actually have a conversation with someone who works with the company managing your plan. Make sure that there are no “hidden” details that you’ll wish you would have understood later.In many cases, using money from your 401K plan can be a solid decision to fund other investments. The money is there. It is yours. You have access to it and therefore it’s a viable resource. As with all your investments, just perform due diligence and never rush the decision.