People who have a 401(k) can often borrow from those accounts. This can help them pay their bills during financial emergencies, such as medical one, for instance. But, borrowing from one’s retirement account also poses substantial financial risks, especially to their retirement.
Loans from a 401(k) work as follows. People can borrow up to half of their account balances or a maximum of $50,000 from those accounts. Reasons for borrowing may include medical emergencies and the down payment on a primary residence. Borrowers then have 10 years to repay those loans with interest. The interest rate tends to be tied to the prime rate, the rate that banks charge each other. Loan repayments and interest payments are still 401(k) contributions. The 401(k) participant, in essence, acts as a lender to herself and repays the loan to herself.
The above excerpt was originally published in Forbes.
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