First Person: I Was a Serial Borrower From My 401(k)

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I never believed it was a good idea to borrow from my 401(k), but it seemed like a better idea compared to other options. I confess that I am a serial borrower from my 401(k). Last year, I made a vow that I would not keep making the same mistake. I came up with a few ways to create a financial buffer between myself and my 401(k). According to a recent article by the New York Times, dipping once into a 401(k) often leads to another dip. I have dipped into my company-sponsored retirement account three times, which would make me a serial borrowing. The article cited a Fidelity study that found serial borrowers don't save as much for retirement because they are always trying to pay back the loans. Also, some experts say it's like paying double tax.

Being tempted by the interest

The first time I took out a loan from my 401(k) was to pay for a car loan. I was tempted by the low interest rate. At the time, I couldn't get a car loan for less than 8 percent. Yet, I could take $15,000 out of my retirement account at a much lower interest rate. Besides, I told myself, I would be paying back myself the interest. However, I ended up saving about 5 percent less for retirement as I was paying back the loan. According to the article, the average interest rate for a 401(k) loan is about 4.25 percent.

Going for a double dip

My company-sponsored retirement plan allowed me to take out two loans. After I had paid down my first 401(k) loan, I decided to buy a condo. However, I didn't have the 3 percent down payment I needed to secure the loan. I decided to take out a second loan from my 401(k) so I could purchase the condo. Having two loans created a bit of a financial burden, but it seemed better to me than having credit card debt. I was able to sell my condo after two years, making about $30,000. At that time, I paid off both of my 401(k) loans.

Tapping retirement fund for college

I didn't want my son to have to take out a student loan, but I didn't have enough cash to pay for one of his tuition bills. After having had good experiences with my first two loans, I decided to tap my retirement to pay for my son's college. I set up the loan to be paid off in one year, which was the minimum amount of time for a loan offered by my plan. When my company sold to another company, I had to either pay off the loan in full or arrange to make monthly payments to my former plan since the money would not longer be deducted from my paycheck. Because I only had a few months left on the loan, I was able to use my savings to pay it off.

I no longer view my 401(k) as an emergency savings account, but I understand the temptation. Fidelity reported that two-thirds of the 401(k) participants took out more than one loan in 12 years. Twenty-five percent came back for a third or fourth as I did. Twenty percent borrowed five times or more. For me, the greatest deterrent is the fact that my job is not really secure. I don't want to go through the hassles of having to pay back a loan if my job situation changes. As I edge closer to retirement, I realize I rather have the money there for my old-age problems and financial needs.

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