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Should I take a loan from my 401(k) to pay off my home?


Loans from 401(k) plans are usually considered a bad idea, and taking one out to pay off a mortgage may be one of the worst reasons to do it. The appeal would be owing money, and paying interest, to yourself through the plan rather than to a bank (a 401(k) loan must be made at a market interest rate; if your employer allows the loans, the plan administrator will have the details). But don’t forget that the money you borrow isn’t producing returns while it’s out of your account.
Had the money been kept working in the plan, the returns would have accrued tax free, too, amplifying the potential hit to your retirement fund while you’re repaying the loan. And by using the loan proceeds for the otherwise noble cause of paying off your home, you lose another tax break, the deduction for mortgage interest.
A 401(k) loan isn’t a great idea even when you make the payments, and it’s much worse if you don’t. If you skip payments and are found in default, then the outstanding amount is likely to be treated as a distribution and taxed at the borrower’s top tax rate, with a 10 percent penalty tacked on.
-Conrad de Aenlle