Borrowing Money From A 401k, TSA Or Other Defined Contribution Retirement Plan

Advantages

Disadvantages

You can usually receive the money within a week or two.

The loan must be paid back within 5 years unless it's used to buy a house.

You can borrow up to 50% of the vested balance of your account, up to $50,000.

You cannot borrow small amounts - usually less than around $1,000.

The rate on the loan is usually reasonably low. Also, there is no penalty for the withdrawal as long as it's paid back on time.

You must pay interest. The interest you pay on the loan is paid with after-tax dollars, and will be taxed AGAIN when you take a distribution from the plan.

You can usually borrow for any reason.

You lose tax-deferred growth on the money that you've taken out of the account.

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You will have to pay a loan-processing fee. On a small loan, the fee can be a large percentage of the amount borrowed on top of the interest you have to pay.