Should you take a loan from your 401(k)?

When we moved to Pennsylvania in 1996, I wanted to buy an old house. After months of looking, we found a stone farmhouse close to my new job and in a good school district. There was just one problem: We didn’t know if we could afford it.

From the visit, I got an idea for how we might afford the property. It had a small cottage, separate from the main house, which might provide rental income that we could then use to help cover the mortgage. We still needed a large down payment, however. But I also had an idea for where to get that money. I’d borrow from myself.First, I rolled an IRA into my new 401 plan at work. Once it was transferred, I borrowed the maximum allowed from the plan—$50,000.

Read: I took Social Security at 62 and now regret it. Is there a way to increase my Social Security benefit? Vanguard had other, more specific reasons to counsel workers against borrowing. The money would be “out of the market” until it was paid back. This meant I would miss out on gains if there was a run-up in stock prices. But by the same token, I might avoid a loss if share prices happened to drop while I had a loan outstanding. This was a bit of a tossup because it depended on timing.

I could imagine a black swan event like this occurring, just not to me. Like most people, I had faith in “recency”—that the current conditions I enjoyed would flow seamlessly into the future. I felt confident that my job was safe and my health would remain good. One at a time. Some 401 plans allow workers to have more than one loan outstanding at any given time. Those who take out two loans or more have a higher rate of defaulting. They’re often borrowing from Peter to pay Paul.

Source: Loan Digest (loandigest.net)

That's not exactly borrowing...

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