By Amy E. Feldman
PHILADELPHIA (CBS) – Sounds like a good plan: rather than paying those evil bankers to get a loan, why don’t I just use my own money in my 401(k) plan and then only have to repay myself. And I’m not evil. Most of the time.READ MORE: Sesame Place Announces Changes To Diversity Programs After Recent High-Profile Racial Incidents
Here’s the thing: while the law allows you to borrow up to $50,000 from your 401(k) plan, there are tax law implications.
When you contribute to a 401k normally, the money goes in before taxes are taken out, and the taxes are paid when you withdraw the money during retirement. But, if you borrow against that 401(k), when you pay back the loan, the payments are made with after-tax dollars.READ MORE: 1 Dead, Multiple People Injured In Crash Involving Bus On New Jersey Turnpike
When you take the money out again in retirement, you’ll have to pay taxes on the money again.
But the tax issue is even less of a problem than what happens if you are laid off or quit your job. Because unlike a typical five year repayment schedule on a 401k loan, if you’re not employed anymore you may be required to pay off the entire balance, usually within 60 days.MORE NEWS: Local Red Cross Volunteers Helping Kentucky Flood Victims
The majority of workers who leave their employers with a 401(k) loan outstanding wind up defaulting on their loans. Talk to your plan administrator before making any decisions.