Precisely because economic conditions have changed, I would use a loan from your 401(k) as a last resort. You are taking monies out of your account when it has decreased significantly due to the current downturn. Once you take those monies out (i.e. sell funds to give you the loan), you will not have the opportunity to recoup those losses. This is because you are repaying the loan in cash, not in those sold fund units. Note that each 401(k) plan is different in that you might be able to choose which specific funds to take the loan from or you might have to take the money proratably from all the investments in your 401(k). So if you have a choice, and you are going this route, withdraw from a stable asset or money market option (caveats and caution please – depends on your age, retirement horizon and asset allocation). Paying yourself 6% is not a bad rate of return, but realize that you are paying yourself back with after-tax dollars; when you retire, you will withdraw the monies and pay taxes again. Finally, you indicate relative job stability to pay the monthly loan amounts but in the event that you leave your job, your loan must be paid off in full (generally 30 to 90 days depending on your plan) to avoid the 10% penalty (if you are not 59 ?) and related income taxes.

It seems like such a simple solution, but as with most issues that are financial, it is not. Borrowing from your 401(k) is very rarely a good idea. Most 401(k) plans allow you to borrow up to 50 percent of your vested account value or $50,000, whichever is less. You have up to five years to repay the loan (longer if you are using the funds to purchase a first home). Interest on the loan is paid directly into your account at a reasonable rate such as 6 percent, but while the loan money is out of the 401(k) account it loses all the compounding of returns it would have earned had those funds not been removed. Often the burden of repaying the loan means the participant cannot afford to maintain the same level of regular contributions to their 401(k). That means the account will not continue to grow at the same rate as before the loan. Additionally if you are not making new contributions to your 401(k) because you are trying to re-pay the loan, you lose any employer matching contributions. Probably the most important reason not to take a loan from your 401(k) is that the loan repayments are made with after-tax dollars. For example, if someone is in a 28 percent marginal tax bracket you must earn $139 for $100 made in loan payments. The interest payments that you make on the loan are not tax deductible and will be considered as earnings in the account. Remember these payments are made with after tax dollars, but they will be taxed again when you take distributions from your 401(k) at retirement. Finally if you leave your job, lose your job, or if the plan gets terminated for any reason, usually the loan must be repaid in full within 90 days. If it is not repaid, the IRS considers this a defaulted loan and a “deemed distribution.” You must pay income taxes on the amount not repaid. If the borrower is younger than 59 1/2, he or she will usually have to pay a 10 percent excise tax for an early distribution as well. Taking a loan from your 401(k) involves more variables than you can control, and for the majority of people it is not a good idea.

It seems like such a simple solution, but as with most issues that are financial, it is not. Borrowing from your 401(k) is very rarely a good idea. Most 401(k) plans allow you to borrow up to 50% of your vested account value or $50,000, whichever is less. You have up to five years to repay the loan (longer if you are using the funds to purchase a first home). Interest on the loan is paid directly into your account at a reasonable rate such as 6%, but while the loan money is out of the 401(k) account it loses all the compounding of returns it would have earned had those funds not been removed. Often the burden of repaying the loan means the participant cannot afford to maintain the same level of regular contributions to their 401(k). That means the account will not continue to grow at the same rate as before the loan. Additionally if you are not making new contributions to your 401(k) because you are trying to re-pay the loan, you lose any employer matching contributions. Probably the most important reason not to take a loan from your 401(k) is that the loan repayments are made with after-tax dollars. For example, if someone is in a 28% marginal tax bracket you must earn $139 for $100 made in loan payments. The interest payments that you make on the loan are not tax deductible and will be considered as earnings in the account. Remember these payments are made with after tax dollars, but they will be taxed again when you take distributions from your 401(k) at retirement. Finally if you leave your job, lose your job, or if the plan gets terminated for any reason, usually the loan must be repaid in full within 90 days. If it is not repaid, the IRS considers this a defaulted loan and a "deemed distribution." You must pay income taxes on the amount not repaid. If the borrower is younger than 59 1/2, he or she will usually have to pay a 10% excise tax for an early distribution as well. Taking a loan from your 401(k) involves more variables than you can control, and for the majority of people it is not a good idea.

It always sounds great to say let me borrow my own money and pay myself back.  In principal, it’s not a horrible idea. In today’s market, a 6% return sounds great when you look at your investments that have been down significantly over the last year. The biggest problem that I have with taking a 401(k) loan is that the statistics show that a large percentage of these loans are never fully paid back. If you do not pay the loan back, it’s treated as a distribution and assuming that you are under age 59 ?, then you pay tax on the distribution plus a 10% penalty.  This usually results in paying almost half of the amount of the loan balance in taxes!  Worse than that, you now do not have the funds in your 401(k) account that you will need for your retirement. Most people have good intentions to pay their loans back but what often happens is that they change jobs before the loan is paid back. When you change jobs you have to pay off the loan before you can roll your balance out of the plan or it is treated as a distribution.  Many do not have the funds to pay back the loan so they simply take it as a distribution and get taxed. My suggestion is this is your retirement money, don’t borrow it!