Fewer workers are borrowing from their 401(k) plans.
The percentage of Fidelity 401(k) account holders with outstanding 401(k) loans has fallen to 21 percent, the lowest it’s been since 2009, according to the latest quarterly data from Fidelity Investments. But while that might sound like good news, it still means that 1 in 5 folks with a 401(k) are currently borrowing from their retirement funds.
As Kevin Barry, Fidelity’s president of workplace investments, notes: “Key to a successful retirement strategy is having a solid contribution rate and not tapping your 401(k) for short-term expenses.”
Should you borrow from your 401(k)?
So is it ever OK to borrow from a retirement account?
In theory, no — you should avoid borrowing against your retirement at all costs. It’s better to tap your emergency fund than to take on retirement-risking debt. We recently included raiding your retirement savings in “Beware These 12 Common Money Mistakes.”
If you take out a $5,000 loan from your 401(k), you — hopefully — will repay the $5,000 plus interest to your account. Still, you will lose out on however much money that $5,000 could have earned from long-term market gains.
Of course, life doesn’t always go according to plan — and many Americans have little to no money set aside for emergencies. Recent surveys have found that 37 percent of folks could not pay for an unexpected medical bill of more than $100, and 64 percent of drivers could not pay for an unexpected car repair bill.
In reality, whether it’s OK to borrow from your retirement account depends on your situation.
As Money Talks News founder Stacy Johnson has explained:
“Whenever someone asks me about borrowing more to deal with debt, the first question I have is, ‘Why are you in debt in the first place?’ If you have debt because you’re regularly spending more than you’re making, all you’re doing is kicking the can down the road. … If, however, the debt you’re dealing with arose because of a temporary and now resolved situation, such as an illness or job loss, great. The less interest you pay, the sooner you’ll recover.”
For more guidance, check out “Ask Stacy: Should I Borrow From My Retirement Account to Pay Debts?” The article details the six situations in which Stacy considers it a bad idea to borrow against your retirement — and four situations in which it might make sense.
Additionally, “Borrowing From Your 401(k)? 6 Traps to Avoid” details the potential drawbacks of borrowing from a retirement account.
What are your thoughts about taking loans from your retirement account? Share opinions or experiences with us below or on our Facebook page.