Borrowing Funds from Your 401(k)

One of the benefits that can come with a 401(k) is the ability to borrow from the fund.

That doesn’t sound like much of an advantage. Financial experts will usually advise against borrowing from a pension pot. They’ll argue that you’ve set that money aside for the future and you shouldn’t touch it until you retire. The risk is that having borrowed from your 401(k), you’ll neglect to pay it back. Or you’ll lose the benefits of compound interest that not touching your 401(k) can bring.

If you want to borrow money, there are plenty of other places that you can turn to, without breaking into your retirement fund.

But borrowing from your 401(k) can sometimes be a smart move that delivers some valuable benefits.

It doesn’t affect your credit rating. Because you’re borrowing your own funds, the only lender at risk is yourself. If you have a spotty credit rating or don’t want to affect your score, borrowing from your 401(k) can provide a solution.

As long as you meet the repayment rules and don’t borrow more than half the amount in the fund or more than $100,000 (whichever is less), you can borrow that money on a tax-free basis.