If your employer has a 401(k) plan, the plan likely has a provision that allows you to borrow from the plan. Although the plan will charge you interest on the amount borrowed, the repayment of the interest and amount borrowed go back into your 401(k) plan. So regardless of the rate of interest charged, whether it is 3% or 5%, isn’t your net cost of borrowing zero because you are paying yourself? Doesn’t it sound like an interest-free loan?
If it were truly an interest-free loan, would it not make sense to borrow as much as possible from your 401(k) plan? After all, if the plan charges a 5% interest rate, where in today’s market can you earn 5% guaranteed? Should you borrow the max from your 401(k) plan to maximize your financial wealth?
The misconception about these plans is that [Read more…] about The Cost of Borrowing from Your 401(k) Plan