Does borrowing from my 401(k) make sense in my specific circumstance?
Your comment regarding your existing finances is very relevant and helpful. You need to understand that generally in personal finance circles, when a strong earning 22 year-old is looking for a loan it's usually a gross spending problem.   Their car costs $1,000 /month and their bar tabs are adding up so the only logical thing to do is get a loan.  Most 22-year-olds don't have a mortgage soaking up their income, or a newborn.   With all of this in mind I essentially agree with DStanley and, personally, and many people here would probably disagree, I'd stop the 401(K) contribution and use that money to pay the debt.  You're still very young from a retirement standpoint, let the current balance ride and forego the match until the debt is paid.  I think this is more about being debt free at 22 quickly than it's about how much marginal money could be saved via 401(k) or personal loan or this strategy or that strategy.  I think at your age, you'll benefit greatly from simply being debt free. There are other very good answers on this site and other places regarding the pitfalls of a 401(k) loan.  The most serious of which is that you have an extremely limited time to pay the entire loan upon leaving the company.  Failure to repay in that situation incurs tax liability and penalties.   From my quick math, assuming your contribution is 8% of $70,000 /year, you're contributing something in the neighborhood of $460/month to your 401(k).  If you stopped contributing you'd probably take home a high $300 number net of taxes.  It'll take around 20 months to pay the loan off using this contribution money without considering your existing payments, in total you're probably looking at closer to 15 months.  You'll give up something in the neighborhood of $3,500 in match funds over the repayment time.   But again, you're 22, you'll resume your contributions at 24; still WAY ahead of most people from a retirement savings standpoint.  I don't think my first retirement dollar was contributed until I was about 29.  Sure, retirement savings is important, but if you've already started at age 22 you're probably going to end up way ahead of most either way.  When you're 60 you're probably not going to bemoan giving up a few grand of employer match in your 20s. That's what I would do. Edit: I actually like stannius's suggestion in the comments below.  IF there's enough vested in your plan that is also available for withdrawal that you could just scoop $6,500 out of your 401(k) net of the 10% penalty and federal and state taxes (which would be on the full amount) to pay the debt, I'd consider that instead of stopping the prospective contributions.  That way you could continue your contributions and receive the match contributions on a prospective basis.  I doubt this is a legitimate option because it's very common for employers to restrict or forbid withdrawal of employee and/or employer contributions made during your employment, but it would be worth looking in to. The set of circumstances that 401k loans make sense, are very small.  As you would expect yours is not one of them.   You make 70K per year and need 6500.  Interest rate is not your problem, budgeting is the problem.  Pay this off in three months not the 48 you are proposing. Why is borrowing from your 401K a bad idea, especially in this case? Look, been there done that, been the over spender.  The sooner that you learn how to handle your money the better.  I was in my 40s when I learned, if you can do this now you can be really wealthy by the time you get to be my age. Dream a bit.  How much margin would you have in your life if you were able to pay this off in 3 months?  How much better would your life be?  Go forth and do great things.  I believe in you. I completely agree with Pete that a 401(k) loan is not the answer, but I have an alternate proposal: Reduce your 401(k) contribution down to the 4% that you get a match on.  If you are cash poor now and have debts to be cleaned up, those need to be addressed before retirement savings.  You'll have plenty of time to make up the lost savings after you get the debts paid off.   If your company matches 50% (meaning you have to contribute 8% to get the 4% match), then consider temporarily stopping your 401(k) altogether. A 100% match is very hard to give up, but a 50% match is less difficult.  You have plenty of years left ahead of you to make up the lost match.  Plus, the pain of knowing you're leaving money on the table will incentivize you to get the loans paid as quickly as possible.  It seems to me that I would be reducing middle to high interest debt while also saving myself $150 per month.  No, you'd be deferring $150 per month for an additional two years, and not reducing debt at all, just moving it to a different lender. Interest rate is not your problem.  Right now you're paying less than $30 per month in interest on these 3 loans and about $270 in principal, and at the current rate should have them paid off in about 2 years.  You're wanting to extend these loans to 4 years by borrowing from your retirement savings.   I would buckle down, reduce expenses wherever possible (cable? cell phone? coffee? movies? restaurants?) until you get these debts paid off.  You make $70,000 per year, or almost $6,000 per month.  I bet if you try hard enough you can come up with $1,100 fairly quickly. Then the next $1,200 should come twice as fast. Then attack the next $4,000. (You can argue whether the $1,200 should come first because of the interest rate, but in the end it doesn't matter - either one should be paid off very quickly, so the interest saved is negligible) Maybe you can get one of them paid off, get yourself some breathing room, then loosen up a little bit, but extending the pain for an additional two years is not wise. Some more drastic measures: I see you've marked an answer as accepted but I MUST tell you that STOPPING your 401k contribution all together is a bad idea. Your company match is 100% rate of return(or 50% depending on structure).  I don't care what market you look at, or how bad a loan you take out, you will not receive 100% rate of return, or be charged 100% interest. Further, taking out a loan against your 401k effectively does two things: It is a loan that must be repaid according to the terms of your 401k  AND in every 401k I've ever encountered, you cannot make contributions to the 401k until the loan is repaid. This in effect stops your contributions, and will almost certainly save you very little on your interest rates on your current loans. I have 4 potential solutions that may help achieve your goal without sacrificing your 401k match and transferring the debt from one lender to another, but they are conditional. Is your company match 100% up to 4% of your salary, or 50% of your contribution (up to a limit you have not yet reached)? This is important.  If it is 100% up to 4%, stop committing the additional 4% and use that to pay down your debt...and after ward set up that 4% as auto pay into an IRA, not into the 401k.  An IRA will make you more money because YOU have control over its management, not your employer. If it is 50% match, contribute until the match is met because you cannot get 50% rate of return anywhere, then take your additional monies and get an IRA.  As far as your debt, in this scenario simply suck it up and pay it as is.  You will lose far more than you gain by stopping your contributions. If you simply must reduce your expenses by 150$ month try refinancing the mortgage and rolling the 6500$ into it.  If you get a big enough drop in the interest rate you could still end up paying less. OR If you cannot make the gain there, try snowballing the three payments.  You do this by calling your student loan vendor and telling them you need to make much smaller payments, like even zero depending on the type of loan.  Then take ALL of the money you are currently spending on the 3 loans and put into the car payment.  When it's gone, roll the whole thing into the higher interest student loan, then finally roll it all into the last student loan.  You'll pay it off faster, and student loans have lots of laws and regulations regarding working with payers to keep them paying something without breaking them. WHATEVER YOU DO, DO NOT STOP YOUR CONTRIBUTIONS.  50% OR 100%, THAT MONEY IS GUARANTEED AT A HIGHER RATE OF RETURN THAN YOU CAN GET ANYWHERE, ESPECIALLY GUARANTEED. "You're getting great wisdom and options. Establishing your actionable path will require the details that only you know, such as how much is actually in each paycheck (and how much tax is withheld), how much do you spend each month (and yearly expenses too), how much spending can you actually cut or replace, how comfortable are you with considering (or not considering) unexpected/emergency spending. You mentioned you were cash-poor, but only you know what your current account balances are, which will affect your actions and priorities. Btw, interestingly, your ""increase 401k contributions by 2% each year"" will need to end before hitting the $18K contribution limit. I took some time and added the details you posted into a cash-flow program to see your scenario over the next few years. There isn't a ""401k loan"" activity in this program yet, so I build the scenario from other simple activities. You seem financially minded enough to continue modeling on your own. I'm posting the more difficult one for you (borrow from 401k), but you'll have to input your actual balances, paycheck and spending. My spending assumptions must be low, and I entered $70K as ""take-home,"" so the model looks like you've got lots of cash. If you choose to play with it, then consider modeling some other scenarios from the advice in the other posts. Here's the ""Borrow $6500 from 401k"" scenario model at Whatll.Be: https://whatll.be/d1x1ndp26i/2 To me, it's all about trying the scenarios and see which one seems to work with all of the details. The trick is knowing what scenarios to try, and how to model them. Full disclosure: I needed to do similar planning, so I wrote Whatll.Be and I now share it with other people. It's in beta, so I'm testing it with scenarios like yours. (Notice most of the extra activity occurs on 2018-Jan-01)" "Since most of the answers are flawed in their logic, I decided to respond here. 1) ""What if you lose your job, you can't pay back the loan"" The point of the question was to reduce the amount paid per month. So obviously it would be easier to pay off the 401k loan rather than the 3 separate loans that are in place now. Also it's stated in the question that there's a mortgage, a child with medical costs, a car loan, student loans, other debt. On the list of priorities the 401k loan does not make the top 10 concerns if they lost their job. 2) ""Consider stopping the 401k contribution"" This is such a terrible idea. If you make the full contribution to the 401k and then just withdraw from the 401k rather than getting a loan you only pay a 10% penalty tax. You still get 90% of the company match. 3) ""You lose compound interest"" While currently the interest you get on a 401k (depending on how that money is invested) is higher than the interest you pay on your loans (which means it would be advantageous to keep the loans and keep contributing to the 401k), it's very unreliable and might even go down. I think you actually have a good case for getting a loan against the 401k if a) You have your spending and budget under control b) Your income is consistent c) You are certain that the loan will be paid back. My suggestion would be to take a loan against the 401k, but keep the current spending on the loans consistent. If you don't need the extra $150 per month, you really should try to pay off the loans as fast as you can. If you do need the $150 extra, you are lowering the mental threshold for getting more loans in the future."
You need to talk to the 401(k) administrator, or HR, for the exact details. Typically, you can only borrow 50% of your balance, and can pay it back up to a ten year term. Some plans have different rules, this is just a common offering.  The larger issue is whether the loan prevents you from making further deposits till repaid. This would cost you not just the growth in the account, but the matched deposits for those years. That would be a deal killer for me. If that were the case, I'd drop my deposits to only get the match, and save for a real deposit without the loan. "A) Yes, it does accomplish the goal of adding more money, but the money is in lieu of any return you can earn while the loan is outstanding. If you somehow knew exactly which periods where going to run negative, and you took a 401k loan during that time, you'd be in pretty good shape, but if you had that information you'd probably be ruling the world in short order and wouldn't care much about a measly 401k. B) It's a nice idea, but unfortunately you are not allowed to set your own interest rate. (If you could your idea would work perfectly.) The interest rate is bank specific, and is typically 1-2 points over prime. But if your plan was to leave your money sitting in cash or low interest bearing accounts anyway, the loan does actually achieve the goal of ""getting more money in there"". Though it's your money; you aren't ""earning"" it." "If the difference in performance is worth it, consider ""borrowing"" from your 401k to put into the Roth.  You pay it back, but you can stretch it out over time, and the interest charged is actually yours, because you borrowed from yourself. But you can only borrow half of the account and you have to pay it back before you can do another loan." Rather than rolling the 401(k) to a new employer's plan, you should roll it into a traditional IRA.  You get more options for the money, there's no limit on how much you can roll over, and you have more control over the money.  If you do a direct rollover, there's no taxes or penalties involved. I'd recommend against taking any money out of the 401(k).  With the numbers you give above, it's like borrowing money at 31.5% interest, which is pretty high, and you're sacrificing your future retirement.  If you leave that money alone to grow with compounding, you'll have a lot more when you retire.  If you're not familiar with the concept of compound interest, it's worth reading up on - the numbers will blow you away. At the very least, if you desperately need to get $3000 out of it, take out just enough to net $3000 after taxes and penalties (not quite $4400 using the numbers you give) and do a rollover with the rest.  At least that way, you're keeping more in the IRA (just over $8600, vs the $5000 in your proposed scenario). Overall, I really recommend you find a way to accomplish your goals without touching your retirement savings. My opinion is that in general, it is probably not a good idea to borrow at a cost in order to make your RRSP contribution.  Banks, of course, have an interest in loaning you money.  Don't expect their literature to be objective on the matter!  They are selling you a product and the advice is biased.  What better way to double-dip than to get guaranteed interest payments from you, as well as ongoing fees for (probably also) getting your loan money invested in their high-fee mutual funds? A year's RRSP contribution room allowance isn't use it or lose it — unlike 401k contribution allowances in the U.S.. That is, unused RRSP contribution room accumulates and you can take advantage of it in later years. If we couldn't carry our RRSP contribution room over, I might feel different about the general case for RRSP loans. Yet there are two specific cases I can think of where it may make sense to borrow and pay back: (a possible case) ... if your tax rate is currently in a high bracket (e.g. 46%), and you anticipate being in a lower income and bracket next year (e.g. 35%), then it would make sense to take advantage of the higher tax savings in the current tax year.  If you waited until the following year to take the deduction, you'd lose out on 11% of the deducted amount.   For a typical person whose income is level or increasing from year to year, this isn't likely to be applicable, but it could help somebody who is going on leave or otherwise has irregular income. (a foolish case) ... if you knew, somehow, that you could realize a return on your invested RRSP money exceeding the pre-tax earnings required to pay the interest on the RRSP loan.  However, I would suggest this is foolish bet to make.  The interest you pay is guaranteed, but the return you are expected to get is probably not (or if it is, it is probably a return lower than what your bank wants to charge on the loan.) If for some reason it does make sense for you, take the money and invest it somewhere better than the high-fee mutual funds the bank is also pushing. The other answers assumed student loan debt -- and for that, it's rarely worth it (unless your company only offers managed plans w/ really bad returns, or the economy recovers to the point where banks are paying 5% again on money market accounts) ... but if it's high rate debt, such as carrying a credit card debt, and the current rate of returns on the 401k aren't that great at the time, it would be worth doing the calculations to see if it's better to pay them down instead. If you're carrying extremely high interest debt (such as 'payday loans' or similar), it's almost always going to be worth paying down that debt as quickly as possible, even if it means forgoing matching 401k payments. The other possible reason for not taking the matching funds are if the required contributions would put you in a significant bind -- if you're barely scraping by, and you can't squeeze enough savings out of your budget that you'd risk default on a loan (eg, car or house) or might take penalties for late fees on your utilities, it might be preferable to save up for a bit before starting the contributions -- especially if you've maxed your available credit so you can't just push stuff to credit cards as a last resort. This is a purely numerical statement that you should be able to check (and you CPA friend should be able to prove, if true).  The general advice, I think, is that you should not use your retirement funds this way, but general advice does not apply equally well to everyone.   You didn't give enough information for us to compute the answer, so you're on your own there.  If you do this (or have the CPA do it), make sure that it accounts for all pluses and minuses that you'll have.  On the minus side, you get any direct penalties in addition to potential loss of right to contribute for a period of time, so make sure you consider both aspects, especially to any degree that you would lose an employer contribution or match.  Also consider the fact that the money already in is tax advantaged, and you won't be able to replace that amount later.  So there will be a compounding effect to what was lost. (This may or may not be balanced by a mortgage interest deduction down the road - My guess is that it will not, but, again, the details of your situation may dictate a different path.  The mortgage interest deduction decreases each year as you pay more principal whereas the compounding from being tax deferred tends to increase each year.) Would I be taxed at my personal income tax rate upon withdrawal of the   funds for this loan from my professionally managed, balanced 401k (not   Roth funds)? Yes. This is a regular distribution. Why wouldn't you be taxed? What's gifting has to do with anything? If taxable, this would move me to the next higher tax bracket. Depending on your other income - it may, or may not. Whether or not taxable when pulling funds out of the investment   account, when I'm repaid, do I owe Federal tax only on the interest   income portion of repayment funds or on the lump sum & interest   received (all of which which would return to my retirement account in   lump)? Only interest. And you will not return it to your retirement account. Not in a lump and not in installments and not in any other way. It would help if we had numbers to walk you through the analysis. Current balance, rate, remaining term, and the new mortgage details.  To echo and elaborate on part of Ben's response, the most important thing is to not confuse cash flow with savings. If you have 15 years to go, and refinance to 30 years, at the rate rate, your payment drops by 1/3. Yet your rate is identical in this example.  The correct method is to take the new rate, plug it into a mortgage calculator or spreadsheet using the remaining months on the current mortgage, and see the change in payment. This savings is what you should divide into closing costs to calculate the breakeven. It's up to you whether to adjust your payments to keep the term the same after you close.  With respect to keshlam, rules of thumb often fail. There are mortgages that build the closing costs into the rate. Not the amount loaned, the rate. This means that as rates dropped, moving from 5.25% to 5% made sense even though with closing costs there were 4.5% mortgages out there. Because rates were still falling, and I finally moved to a 3.5% loan. At the time I was serial refinancing, the bank said I could return to them after a year if rates were still lower. In my opinion, we are at a bottom, and the biggest question you need to answer is whether you'll remain in the house past your own breakeven time. Last - with personal finance focusing on personal, the analysis shouldn't ignore the rest of your balance sheet. Say you are paying $1500/mo with 15 years to go. Your budget is tight enough that you've chosen not to deposit to your 401(k). (assuming you are in the US or country with pretax retirement account options) In this case, holding rates constant, a shift to 30 years frees up about $500/mo. In a matched 401(k), your $6000/yr is doubled to $12K/year.  Of course, if the money would just go in the market unmatched, members here would correctly admonish me for suggesting a dangerous game, in effect borrowing via mortgage to invest in the market. The matched funds, however are tough to argue against. "The original question was aimed at early payment on a student loan at 6%. Let's look at some numbers.  Note, the actual numbers were much lower, I've increased the debt to a level that's more typical, as well as more likely to keep the borrower worried, and ""up at night.""  On a $50K loan, we see 2 potential payoffs. A 6 year accelerated payoff which requires $273.54 extra per month, and the original payoff, with a payment of $555.10. Next, I show the 6 year balance on the original loan terms, $23,636.44 which we would need to exceed in the 401(k) to consider we made the right choice.  The last section reflects the 401(k) balance with different rates of return. I purposely offer a wide range of returns. Even if we had another 'lost decade' averaging -1%/yr, the 401(k) balance is more than 50% higher than the current loan debt. At a more reasonable 6% average, it's double. (Note: The $273.54 deposit should really be adjusted, adding 33% if one is in the 25% bracket, or 17.6% if 15% bracket. That opens the can of worms at withdrawal. But let me add, I coerced my sister to deposit to the match, while married and a 25%er. Divorced, and disabled, her withdrawals are penalty free, and $10K is tax free due to STD deduction and exemption.) Note: The chart and text above have been edited at the request of a member comment.  What about an 18% credit card? Glad you asked -  The same $50K debt. It's tough to imagine a worse situation. You budgeted and can afford $901, because that's the number for a 10 year payoff. Your spouse says she can grab a extra shift and add $239/mo to the plan, because that' the number to get to a 6 year payoff.  The balance after 6 years if we stick to the 10 year plan? $30,669.82. The 401(k) balances at varying rates of return again appear above. A bit less dramatic, as that 18% is tough, but even at a negative return the 401(k) is still ahead. You are welcome to run the numbers, adjust deposits for your tax rate and same for withdrawals. You'll see -1% is still about break-even.  To be fair, there are a number of variables, debt owed, original time for loan to be paid, rate of loan, rate of return assumed on the 401(k), amount of potential extra payment, and the 2 tax rates, going in, coming out. Combine a horrific loan rate (the 18%) with a longer payback (15+ years) and you can contrive a scenario where, in fact, even the matched funds have trouble keeping up. I'm not judging, but I believe it's fair to say that if one can't find a budget that allows them to pay their 18% debt over a 10 year period, they need more help that we can offer here. I'm only offering the math that shows the power of the matched deposit.   From a comment below, the one warning I'd offer is regarding vesting. The matched funds may not be yours immediately. Companies are allowed to have a vesting schedule which means your right to this money may be tiered, at say, 20%/year from year 2-6, for example. It's a good idea to check how your plan handles this. On further reflection, the comments of David Wallace need to be understood. At zero return, the matched money will lag the 18% payment after 4 years. The reason my chart doesn't reflect that is the match from the deposits younger than 4 years is still making up for that potential loss. I'd maintain my advice, to grab the match regardless, as there are other factors involved, the more likely return of ~8%, the tax differential should one lose their job, and the hope that one would get their act together and pay the debt off faster." The first step is to contact the company you are considering using as an administrator. Ask if they have a loan provision.  For what it's worth, I looked at Schwab, and it seems to indicate they do not offer loans against this type of 401(k). That doesn't mean no one does, just that you may need to look around. One should fund a 401(k) or matched retirement account up to the match, even if you have other debt. Long term, you will come out ahead, but you must be disciplined in making the payments. If one wants to point out the risk in a 401(k), I'd suggest the money need not be invested in stocks, there's always a short term safe option. 401K accounts, both regular and Roth, generally have loans available. There are maximum amounts that are based on federal limits, and your balance in the program. These rules also determine the amount of time you have to repay the loan, and what happens if you quit or are fired while the loan is outstanding. In these loan programs the loan comes from your 401K funds. Regarding matching funds. This plan is not atypical. Some match right away, some make you wait. Some put in X percent regardless of what you contribute. Some make you opt out, others make you opt in. Some will direct their automatic amounts to a specific fund, unless you tell them otherwise.  The big plus for the fund you describe is the immediate vesting. Some companies will match your investments but then only partially vest the funds. They don't want to put a bunch of matching funds into your account, and then have you leave.  So they say that if you leave before 5 years is up, they will not let you keep all the funds. If you leave after 2 years you keep 25%, if you leave after 3 years you keep 50%... The fact they immediately vest is a very generous plan. "To answer the first part of your question: yes, I've done that!  I did even a bit more.  I once had a job that I wasn't sure I'd keep and the economy wasn't great either.  In case my next employer wouldn't let me contribute to a 401(k) from day one, and because I didn't want to underfund my retirement and be stuck with a higher tax bill - I ""front-loaded"" my 401(k) contributions to be maxed out before the end of the year.  (The contribution limits were lower than $16,500/year back then :-)) As for the reduced cash flow - you need of course a ""buffer"" account containing several months worth of living expenses to afford maxing out or ""front-loading"" 401(k) contributions.  You should be paying your bills out of such buffer account and not out of each paycheck.  As for the reduced cash flow - I think large-scale 401(k)/IRA contributions can crowd out other long-term saving  priorities such as saving for a house down payment and the trade-off between them is a real concern.  (If they're crowding out basic and discretionary consumer expenses, that's a totally different kind of problem, which you don't seem to have, which is great :-)) So about the trade-off between large-scale 401(k) contributions and saving for the down payment.  I'd say maxing out 401(k) can foster the savings culture that will eventually pay its dividends.  If, after several years of maxing out your 401(k) you decide that saving for the house is the top priority, you'll see money flow to the money-market account marked for the down payment at a substantial monthly rate, thanks to that savings culture. As for the increasing future earnings - no.  Most people I've known for a long time, if they saved 20% when they made $20K/year, they continued to save 20% or more when they later made $100K/year.  People who spent the entire paycheck while making $50K/year, always say, if only I got a raise to $60K/year, I'd save a few thousand.  But they eventually graduate to $100K/year and still spend the entire paycheck.  It's all about your savings culture. On the second part of your question - yes, Roth is a great tool, especially if you believe that the future tax rates will be higher (to fix the long-term budget deficits).  So, contributing to 401(k) to maximize the match, then max out Roth, as others suggested, is a great advice.  After you've done that, see what else you can do: more 401(k), saving for the house, etc." What you are seeing is the effects of inflation. As money becomes less valuable it takes more of it to buy physical things, be they commodities, shares in a company's stock, and peoples time (salaries).  Just about the only thing that doesn't track inflation to some degree is cash itself or money in an account since that is itself what is being devalued.  So the point of all this is, buying anything (a house, gold, stocks) that doesn't depreciate (a car) is something of a hedge against inflation. However, don't be tricked (as many are) into thinking that house just made you a tidy sum just because it went up in value so much over x years. Remember 1) All the other houses and things you'd spend the money on are a lot more expensive now too; and 2) You put a lot more money into a house than the mortgage payment (taxes, insurance, maintenance, etc.) I'm with the others though. Don't get caught up in the gold bubble. Doing so now is just speculation and has a lot of risk associated with it.