Q: My wife and I are considering tapping her 401(k) for home improvements. But we’ve heard there could be some penalties involved if she loses her job and can’t pay the loan back. What’s the worst that could happen if we borrow, say, $10,000?
A: If you can’t pay the money back in short order, what was a loan becomes a taxable distribution. You would owe a 10% federal penalty plus income taxes on any outstanding balance. If you’re in the 25% tax bracket, you would have to come up with $3,500 to pay the Internal Revenue Service — plus any penalties and income taxes your state might assess.
The greater damage, though, is the loss of future tax-deferred earnings that money could have made for you. The $10,000 could have grown to $100,000 in 30 years, assuming an average 8% annual return.
That’s why it’s not a good idea to tap retirement funds, particularly for discretionary spending such as home improvements. Trim your other expenses and save up the money instead. You’ll be better off in the long run.
Social poster
Downloads
- No documents for download.
