John, I can understand how these lower rates look attractive but rates are not the whole story. There are reasons why taking out a loan on your 401k should be your LAST resort for funds. I have assembled a list of reasons below:
Borrowing on your Retirement: Those funds are there for only one reason. Your retirement. If you dip into it for purchases or paying off debt you are just transferring that debt until you are older.
Fees: Most 401k plans charge fees to initiate the loan and possible charge a annual fee to keep up with the record keeping
Employment Status: Did you know that if you lose your job or leave your job for another one you will have to pay that loan back in full before the end of the year. If you do not it will be considered a distribution and subject to taxes and penalties. How that lower interest rate look now?
Taxes: Those funds your employer is deducting to repay that loan is after-tax. You lose the tax deduction plus you have to pay taxes on the loan payment.
Golden rule: You are breaking the golden rule: Pay yourself first!!!!!
Living beyond your means: If you need to dip into your retirement savings, this may be a sign you are living beyond your means. You may want to look at your entire financial picture to see where you are going wrong. You may want to post a question to me, your Financial Handyman.
There are extreme circumstances in life where you need to tap your 401k plan, but it needs to be your last resort.
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