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October 23, 2003 at 08:00 PM
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Some producers advise their boomer clients not to borrow against their 401(k) plans because those assets are, after all, earmarked for retirement–a life stage getting terrifyingly close for many boomers.
But at the same time, boomers often have collected a sizeable 401(k) stash after saving for so many years. And for one reason or another, many do want access to some of those funds.
Its now easier than ever to borrow from a 401(k) plan, since the IRS late last year did away with limits on the number of loans a person could take out on his or her plan assets.
(Participants still cannot borrow more than half of accumulated plan assets or $50,000, whichever is less.)
Michael Waddell, a retirement consultant with Watson Wyatt Worldwide, Washington, thinks arguments against borrowing against a 401(k) account often dont hold water.
“The hard question is, suppose you have to?” says Waddell. “It may be better to take it out of your 401(k) than elsewhere.”
The big advantage of a 401(k) loan is its low interest rate, often only a percentage point above prime, he notes.
Moreover, Waddell says, “Its just easy to do. Its a matter of calling a toll-free number. There are no application forms. And you can have a check in a week.”
Its true that someone borrowing from a 401(k) must repay the loan with after-tax money, he says. And later, when the person retires, that same money is taxed again.
“But the same thing happens with loans from someplace else, so thats not really a disadvantage,” Waddell says. “The fact it was borrowed from a bank or a 401(k) doesnt make a difference.”
