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The Basics Q&A: Should I Borrow From My 401(k)?

Q. I need a large amount of cash—more than I have in my savings account. Should I tap into my 401(k)?

A. While it may sometimes be tempting to borrow money from your 401(k), dipping into your retirement funds should probably be considered only as a last resort. Even though it may look like the only choice you’ve got, I’d encourage you to consider other ways to access cash that could be more beneficial to your long- and even short-term financial goals.

By borrowing from your retirement savings, you’d be interrupting the potential for the funds in your 401(k) account to grow through tax-deferred compounding—and that could make it more difficult for you to reach your long-term retirement goals. Taking savings out of your account—even for a short time—might mean missing out not only on the growth of the money you invest, but also any growth of that money’s earnings.

Answered by:


Sylvie Feist Director, Retirement & Personal Wealth Solutions
Bank of America Merrill Lynch

Taking savings out of your account—even for a short time—might mean missing out not only on the growth of the money you invest, but also any growth of that money's earnings.

In addition, although you generally have up to five years to repay loans from your 401(k), leaving your job (or losing it) before it’s repaid may mean you have to pay the money back in full quickly.If you can’t, it could be treated as a taxable distribution, which could then be subject to federal and state income taxes, as well as an additional 10% federal tax if you’re under age 59½.

Another concern: When you take loans from a 401(k) account, you generally must repay the principal and interest through after-tax payroll deductions. This will reduce your take-home pay, and you might very well be tempted to reduce your current contributions to your 401(k) while you’re repaying the loan, further reducing your retirement savings.

So before you consider borrowing from your “future” self, make sure you’ve explored your other lending options. Talk with your advisor about whether you might be better off using either a home equity line of credit—or even whether you might be able to borrow against other investment accounts. Calculate how many years you have until retirement—and consider what the impact might be if you don’t end up working as long as you expect, for whatever reason. Your advisor can help you understand your choices.

3 Questions to Ask Your Advisor

  1. What are some other options besides borrowing from my 401(k) to help me meet a large cash need?
  2. Should I consider selling investments to raise cash?
  3. Will my retirement savings be on track to help me meet my long-term goals?

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Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.


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