Is it a good idea to borrow from your 401(k)? Some individuals with hefty expenses, like student loans, may consider dipping into these accounts to cover bills or pay off debt. Here are some of the most common reasons why people take loans from their 401(k) and moments when you should (and should not) borrow from your 401(k) balance.

Common Reasons Why People Take Loans From Their 401(k)

Megan Yost, SVP communications at Segal Benz, said there are three primary reasons why people take a loan from their 401(k).
It’s usually their largest source of savings that they can access. They can secure the money in a matter of days. It’s a smarter way to get short-term cash than a high-interest loan.

Matthew Compton, managing director of retirement services at Brio Benefit Consulting, said most 401(k) plans also allow a participant to tap into their 401(k) balance without reaching a qualifying event such as a loan or hardship withdrawal. Typically, 50% of a participant’s total balance can be taken via a loan, with a maximum loan amount of $50,000.

“If loans are available, that is typically the better option as it allows the participant to borrow money from themselves and the interest on the loan is applied back to their own balance rather than paid to an outside financial institution,” Compton said.

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