More Loans Being Taken From 401(k)s, Despite Consequences

More Americans are dipping into their 401(k) retirement plans for loans to reduce personal debt or pay other bills.

Almost 2.4 million Americans borrowed an estimated $18.2 billion from their 401(k) retirement plans last year, according to Spectrem Group, a San Francisco research firm that tracks the retirement business.

This adds to the nation’s debt levels. “By borrowing from your 401(k) plan, you’re taking money that’s earmarked for retirement and perhaps jeopardizing your retirement savings goal,” said Kathryn Hopkins, executive vice president of Fidelity Institutional Retirement Services Co., the nation’s leading provider of 401(k) plans.

On the other hand, the ability to borrow allows more Americans to feel comfortable about investing in such a plan because they know that in an emergency they have access to their money, Hopkins said.

“A 401(k) loan may not be the best way to finance one’s personal life, but the loans must be paid back and there are tax consequences if they aren’t,” said Jeff Close, Spectrem’s marketing director.

The average 401(k) loan in 1998 was $7,600, Close said. The loans represent about 1.6% of the $1.14 trillion invested in 401(k) plans in the United States.

Loans from 401(k) plans cannot exceed the greater of $10,000 or 50% of what’s in an account and cannot be more than $50,000. Typically, the loans must be repaid within five years or when the individual leaves the company, Close said. Companies are not required to offer employees a loan option.

There are no tax consequences in borrowing from a 401(k) plan as long as the loan is repaid, Close said. But because the money is no longer in the account, it can no longer grow with investment returns.