Downsides to Borrowing From Your 401(k) to Fund Your Business

A potential source of short-term or emergency funding for your business might be a loan from your or your spouse’s 401(k) retirement plan – if the plan has a loan provision in place.
 
If you can take loans with your plan, be sure to read the fine print to know what you’re getting into, and consider these two factors:
 
  • If you drain your retirement funds for your business, and your business doesn’t make it, what will you have for retirement?
  • The advantage of a 401(k) is the tax-advantaged growth of assets. If you borrow from the plan, you’ll lose potential growth.
In the long run, a low-interest loan from a bank or other financial institution might actually prove to be a more viable option.
 

Game Plan

  • To find out whether your 401(k) has a loan provision, check with your employer or plan administrator.
  • Visit the IRS website for more information on borrowing from 401(k) plans.
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