Are you planning to dip your hands in your 401(k) and borrow from your retirement funds? As a part of 401(k) loan basics, you should look at this option and try to avoid any mistakes that might make this option costlier than it should be. Here is a list of some of the most common mistakes and misconceptions with regards to 401(k) loans.

Delay your savings for retirement
When repaying their 401(k) loan, many borrowers lower their contributions to the 401(k) account. If you use the entire retirement period of five years, this can be quite a setback. Remember that when you make lower contributions, the company’s matching contributions also lower down. This means you would just be delaying your retirement savings. Also, there are instances when your plan might require you to first repay the loan in full before you make any further contributions to the 401(k) account. In case your plan demands you to first repay the loan in full before you make any further contributions, you can always open up a traditional IRA for saving money.

Not understanding the early tax distribution
With borrowing loans comes the chance of defaulting. If you are planning to apply for a 401 (k) loan or have already taken one, you might not want to default the loan no matter what. That is because when you default the loan, your outstanding balance is liable for taxable distribution as reported on IRS form 1099-R.

Not analyzing job security
If you are planning to borrow from your 401(k) funds, you should have a secure job. If you lose the job, you will have to repay the loan immediately to avoid any tax penalty. The good part is if you are not able to sustain the job, you have until the next federal filing date to repay your outstanding loan. And, if you even default on this date, your unpaid loan will be categorized as taxable distributions. So, if you feel your job is a bit unsteady, try not to dip into your 401(k) amount.

Thinking of a 401(k) as the cheapest option
Borrowing from your 401(k) funds is not the cheapest option available. It might seem cheap as the interest rates would be what you get from a credit card. Yet, when you borrow funds from your 401(k) fund, your investments wear out to get you access to this loan amount. So, while it may seem that you are doing well, you are actually losing out. This is why financial advisors always instruct people never to take a 401(k) to pay off debt on credit cards that were used for overspending as this can cost you big.

These are some of the 401(k) loan basics that you should be aware of before dipping into these funds for a loan. Knowing this information will help you avoid making easily-avoidable mistakes.