Here’s the Least Understood Cost of a 401(k) Loan | Time by Dan Kadlec
Published: October 17 2014
401(k) loans aren’t always a terrible choice. But make sure you keep saving at the same rate during the loan payback period.
A loan from your 401(k) plan has well-known drawbacks, among them the taxes and penalties that may be due if you lose your job and can’t pay off the loan in a timely way. But there is a subtler issue too: millions of borrowers cut their contribution rate during the loan repayment period and end up losing hundreds of dollars each month in retirement income, new research shows.
Academics and policymakers have long fixated on the costs of money leaking out of tax-deferred accounts through hardship withdrawals, cash-outs when workers switch jobs, and loans that do not get repaid. The problem is big. Some want more curbs on early distributions and believe that funds borrowed from a 401(k) should be insured and that the payback period after a job loss should be much longer.