 TITLE: How to Borrow Money From Your 401(k) CONTENT: Drawbacks to 401(k) Loans\n-------------------------\nAssuming the loan and repayment process goes perfectly smoothly, there are several major reasons you should think twice before borrowing from your 401(k) fund:\n*   A 401(k) loan uses money that should be invested and helping accumulate wealth for your retirement. The funds you pull out of your 401(k) cannot gain investment value, and the interest payments you're making to yourself are unlikely to come close to matching the gains you'd make in a moderately successful stock or index fund. (And of course, if you weren't paying yourself back, you could be using what you're paying in interest to increase your 401(k) contribution or invest elsewhere.)\n*   For most borrowers, retirement savings get put on hold until the 401(k) loan is repaid. Payroll deductions for 401(k) loan repayment typically eliminate or greatly reduce 401(k) payments for the five years (or, ideally, less time) it takes to pay off the loan. Losing five or so years of retirement savings, and likely forfeiting some or all of your employer's matching contributions to your 401(k) in the process, is potentially a huge setback in your retirement savings process. The goal with 401(k) plans, as with all long-term savings programs, is to stash funds in small, steady amounts over long periods of time, and let money accumulate through the power of compound growth and reinvestment. A 401(k) loan disrupts that process in a major way, and most funds can never fully recover.\nIf your 401(k) loan process doesn't go smoothly, you could face even worse consequences:\n*   If you lose your job during the repayment period, you must pay back the entire outstanding balance within a grace period specified in your 401(k) loan agreement, or the loan will be considered in default. Grace periods are typically only a few months.\n*   If you default on a 401(k) loan, the outstanding loan balance is treated as taxable income and will likely increase the amount you owe in federal income taxes.\n*   Unless you are older than 59 1\/2, you also will be charged a 10% penalty for making an early withdrawal from your 401(k) fund on any unpaid portion of the loan. END