Employer rules may vary, but 401(k) plans typically allow users to borrow up to half their retirement account balance for a maximum of five years. The limit is $50,000. About one in five plan holders have a 401(k) loan, according to Fidelity Investments, a large retirement plan administrator. Consider these pros and cons:
- The loans are cheaper than credit cards; interest typically equals the prime rate plus one percentage point.
- You pay interest to your own account.
- There’s no impact to your credit score.
- It derails your retirement savings, sometimes significantly.
- Risks include tax consequences and penalties.
- Credit card debt is more easily discharged in bankruptcy.
- The loan itself doesn’t address the reasons you might have accumulated debt.