The Hidden Costs of Borrowing from Your 401(k)

When faced with unexpected expenses or a temporary cash crunch, borrowing from your 401(k) can feel like a convenient solution. After all, it’s your money, and a loan from your retirement account doesn’t require a credit check or lengthy approval process. But while tapping into your 401(k) may provide short-term relief, it comes with long-term consequences that could jeopardize your financial security.

How Does a 401(k) Loan Work?

A 401(k) loan lets you borrow against your retirement savings while avoiding an immediate taxable withdrawal. Under most 401(k) loan rules, you can borrow up to 50% of your vested account balance, with a maximum of $50,000.

Repayment is typically set on a five-year schedule, with equal payments deducted from your paycheck. The 401(k)-loan interest rate is usually tied to the prime rate (the interest rate that most commercial banks charge their most creditworthy customers) plus one or two percentage points. Unlike traditional loans, the interest you pay goes back into your own retirement account.

While this may sound appealing, there are hidden downsides that can affect your financial projections for retirement.

The Risks of Borrowing from Your 401(k)

Although it’s legal and often relatively simple to borrow from a 401(k), the drawbacks can be significant:

• Lost Growth Potential: Money you pull out of your 401(k) isn’t invested, which means you miss out on potential gains and compound growth. Even a small loan today can lead to a large gap in your future balance.
• Repayment Risk: If you change jobs or are laid off, your loan may be due in full within a short window. Failure to repay can turn the balance into a taxable withdrawal, plus a 10% penalty if you’re under 59 ½ years of age.
• Reduced Security: Depending on your repayment schedule, you may feel strapped for cash while also weakening your long-term retirement safety net.

When Does Borrowing from a 401(k) Make Sense?

A 401(k) loan is sometimes used as a last resort, for example, to cover major medical bills or prevent foreclosure. In those situations, it may be preferable to take on high-interest credit card debt. However, because of the risks, it’s not an ideal strategy for most financial needs.

Smarter Alternatives to a 401(k) Loan

Instead of borrowing from retirement savings, explore these options:

• Emergency Savings Fund: A dedicated cash reserve keeps you from dipping into retirement money.
• Personal Loans or Credit Lines: These provide flexibility with transparent repayment terms and often more favorable loan interest rates than the true cost of a 401(k) loan.
• Home Equity Line of Credit (HELOC): Homeowners can often access lower rates with a HELOC for big expenses like tuition or renovations. WesBanco offers flexible HELOC options designed for different financial needs.
• Professional Guidance: WesBanco’s Retirement Specialists can help you evaluate all your options and create a strategy that preserves your retirement security while meeting your short-term needs.

Secure Your Future with WesBanco

Borrowing from your 401(k) may seem like a quick fix, but it often comes at the cost of your long-term financial health. Before you make the decision, explore alternatives that protect your retirement savings.

Learn more about WesBanco Retirement Planning Services and how we can help you build a smarter plan for the future.

WesBanco Bank, Inc. is a Member FDIC. WesBanco Trust and Investment Services, a division of WesBanco Bank, Inc., may invest in insured deposits or Non deposit investment products. Non deposit investment products are not insured by the FDIC or any other government agency, are not deposits or other obligations of, or guaranteed by any bank or any affiliate, and are subject to investment risks including the possible loss of the principal amount investment.

Content is for informational purposes only and is not intended to provide legal or financial advice. The views and opinions expressed do not necessarily represent the views and opinions of WesBanco.

While we hope you find this content useful, it is only intended to serve as a starting point. Your next step is to speak with a qualified, licensed professional who can provide advice tailored to your individual circumstances. Nothing in this article, nor in any associated resources, should be construed as financial or legal advice. Furthermore, while we have made good faith efforts to ensure that the information presented was correct as of the date the content was prepared, we are unable to guarantee that it remains accurate today.