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You’ve been conscientiously saving for your retirement. You signed up for a 401(k) plan at work and take full advantage of the company match. You’re decades away from stopping working, but have already built up a tidy little sum. So you get to thinking: Maybe this money could pay for that graduate degree I have been considering. Or perhaps it would let me buy that new car I’ve been eyeing.

Don’t do it.

Financial advisers are clear on the matter: You should consider funds in a 401(k) untouchable in all but the most dire of circumstances.

“Usually it’s a bad idea,” said Brad Wright, a certified financial planner with New England Financial Planning Group in Burlington.

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Legally, a 401(k) plan may allow participants with savings of at least $20,000 to borrow up to half of the balance, to a maximum of $50,000 (though some plans only allow loans for hardships such as medical expenses, funeral costs or housing crises). The money must be paid back to the account in regular payments, at market interest rates, over no more than five years. Because you are borrowing your own money, you don’t have to meet the underwriting standards imposed by traditional lenders.

The problem, however, is that whatever you borrow is no longer sitting in your account, making more money. An investment of $10,000, earning an annual rate of 10 percent and compounding just twice a year, would have turned into more than $16,000 over the term of a five-year loan.

“The biggest reason not to do it is you’re losing the growth on the money,” Wright said. “You are really holding your retirement accounts back.”

In addition, you face additional risks if you are terminated from your job or decide to quit. Once you are no longer employed by the company that sponsors the 401(k), an outstanding loan is considered an early withdrawal and becomes taxable. It will also be subject to a 10 percent penalty if you are younger than 59½.

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The only time to consider borrowing from your 401(k), said Wright, is when you are faced with an emergency and there is no alternative. Before resorting to withdrawing retirement money, look into home equity lines or refinancing. A growing number of start-up alternative lenders use factors other than traditional credit scores in making lending decisions.

“Look at all other options first,” Wright said.


Have a consumer question or complaint? Reach Sarah Shemkus at seshemkus@gmail.com.