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The Dangers of a 401K Loan


Proverbs 27:12 "The prudent sees danger and hides himself, but the simple go on and suffer for it."

To say that inflation is rising faster than some of us can prepare for it is an understatement. Even the best budgets are now being placed under a Stress Test, which may tempt some of us to make some financial decisions that may have some long-term consequences, greater than a temporary reduced short-term cash flow. Yesterday, I asked you to get a copy of your 401K statement. I received a few emails asking about 401K loans. Some of you realized that you can borrow from your retirement with potentially a lower interest rate than a personal loan or a credit card. I felt a responsibility to inform you of some of the risks that come with this seemingly "match made in heaven". Pros:

  • Loan rates are typically lower than personal loans or signature loans

  • The payments are withdrawn directly from your paycheck

  • The interest paid on the loan goes BACK into your retirement account

Cons:

  • If you separate from your company, voluntarily or involuntarily, the total balance remaining on the loan must be paid back immediately or risk being taxed.

  • If you are under 59.5 years old, a 10% tax penalty may apply.

  • Your taxable income will be raised, potentially putting you into a higher tax bracket for the year.

I know money may be getting tight but before you run to grab some quick and easy cash, make sure you consider the potential consequences. The decision to make a loan on your 401K should be reviewed in relationship to your whole financial plan and figure out if there are potentially some better options. Questions you should as yourself first are, where can you reduce your expenses? Can you increase your income? Can you save more money and make the purchase at a later date? How much do you really need? If you are considering taking a loan from your 401K, to get you through, you may want to consider periodic payments. This way, if there is a separation, you don't have a large financial obligation. Also, only withdraw what you need and not what is available. The loan amount can be up to $50,000 or 50% of the balance, whichever is less. Choose what will get you by, and not what will help you take that extended vacation. 401K loans should be for your needs and not your wants. As today's scripture states, those who are prudent, recognize the dangers and try to avoid them. They try to find alternatives that will satisfy their needs. But the simple will do it anyway and they will suffer for it. Today, I wanted to show you those dangers, and pray you don't go on and suffer for it. Yesterday, I let you know that I was going to release a podcast episode that will let you know under what circumstances taking a loan out from your 401K may be a good idea, which is still coming. So stay tuned for that. Before I go, I don't want you to get the wrong idea. Taking a 401K loan is just another option. But remember, even good options under poor circumstances can be a bad idea...oh my! I like that.

"Even good options under poor circumstances can be a bad idea" -A.B. Ridgeway

I hope you enjoy the rest of your day.

God Bless


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About the blog:


Many Christians struggle with the seemingly conflicting views about our faith and the pursuit of financial gain. They were taught that poverty was piety and that a lack of money was the only way to truly detach themselves from the love of money. Our blog debunks some of those claims, teaches you that you can be rich and righteous, and at the same time fulfill your obligation to tithe and give to the less fortunate. We are dedicated to helping you become cheerful givers by organizing your personal finances, providing investment tips to help you create wealth, and encouraging you to create a gifting strategy that will make your family and God proud.


Meet the Author:



A.B. Ridgeway, MBA (info@abrwealthmanagement.com) is the owner and Christian Financial Advisor with A.B. Ridgeway Wealth Management. With a decade in the finance industry, his goal is to give believers clarity around the most confusing topic in the Bible, money, and tithing. A.B. Ridgeway helps tithing Christians become cheerful givers but unlocking their money-making potential, so they can prosper and be the great stewards of the wealth God has entrusted them with.


This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned. This is strictly for information purposes. We recommend you speak with a professional financial advisor.

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