According to a recent TIAA-CREF survey, almost one in three Americans borrow against their employee retirement plans at one time or another. That must mean it's a smart move, right? Wrong.
As you'll see, borrowing money from your 401(k) or other retirement plan at work can be one of the very worst financial moves you can possibly make.
How 401(k) Loans Work
Not every employer offers employees 401(k) loans, but many do. And companies that do offer loans can elect to only grant those loans for specific purposes like education, medical reasons or first-time home purchases. In most cases the loan must be repaid within 5 years. (The only exception is if you borrow money for a home purchase. In those cases the employer usually allows you to repay the loan over a longer period of time.)
Loan payments are made directly from your paycheck, after tax. As long as you repay the debt within the time allotted, you won't have to worry about income taxes or penalties. But if you default, you could pay both income tax and the early withdrawal penalties.
The last limitation to be aware of is that the most you can borrow is 50 percent of your plan balance or $50,000 -- whichever is less.
Here are seven reasons why these loans can be very bad deals for you.