Please, read the first part 401k-loan

Not a free loan

But cheap doesn’t mean free just because you’re borrowing from yourself, Choi said. “Your 401(k) loan interest payments face double taxation, since they are made with after-tax dollars and then get taxed again when you withdraw them in retirement,” said Choi. “And of course, whatever balances you spend now aren’t earning an investment return for you.”

Other experts share Choi’s point of view. “401(k) loans can be an important resource for participants facing financial hardship,” said Lori Lucas, a CFA charterholder, an executive vice president at Callan Associates, and chair of the Defined Contribution Institutional Investment Association’s research committee.

“The danger is when they are overused for non-essential purposes,” she said. “Participants pay back 401(k) loans with after-tax money. And, they become withdrawals if they go unpaid.”

Make sure your job is safe

Also, before taking a loan from your 401(k), consider how safe your job is. That’s because one of the dangers of a 401(k) loan is that if you leave your job or are laid off, you have to pay the loan off in full within a short period of time, usually 60 to 90 days, said Choi.

The greatest risk with loans is if they don’t get paid off, said Stacy Schaus, a senior vice president at PIMCO.

“Any balance you haven’t paid off at the end of that time is considered an early withdrawal, and if you’re younger than 59 ½, you’ll have to pay income tax on that amount plus an extra 10% tax penalty,” Schaus said. “Unless your job is very secure and you plan on staying with your employer for the duration of the loan, borrowing large amounts from your 401(k) is risky.”

Lucas agreed, and warned about a feature of some 401(k) plans. “While some plan sponsors allow repayment of plan loans after termination, most do not,” said Lucas. “Taxes and penalties can take a huge bite out of participants’ assets if the loan becomes a withdrawal. Further, withdrawn money is then forever lost to the retirement system.”

To be fair, the odds are high that you’ll repay the loan, according to Vanguard’s Utkus. According to his and other research, 90% of loans are repaid.

Still, one in 10 won’t repay their 401(k) loan, more often than not due to a job change. Since you don’t know whether you’ll be among the one in 10 who don’t pay back their loan or the nine in 10 who do, Utkus offered this advice: “If you anticipate changing jobs in the near term, I’d steer away from taking a loan, unless you have money outside the plan to pay off the loan when it becomes due.”

Other disadvantages

Dave Tolve, retirement business leader for Mercer’s U.S. outsourcing business, said borrowing from a 401(k) can have major consequences — even when repaid on time.

And plan participants should consider the advantages of not taking a loan. For instance, your money can keep growing. Plus, if you take money out of your account, even temporarily, you will miss out on valuable compounding and may end up with a significantly smaller nest egg by the time you retire. And, it is much easier to continue saving without the burden of a loan.

“Many people find it hard to continue making regular 401(k) contributions while repaying their loan — making it even harder to get back on the path to preparing for their retirement,” Tolve said.

Wray identified another disadvantage: 401(k) loans are not without fees. Some eight in 10 plans charge a one-time loan fee — of about $72 on average. Another 28% of plans charge an annual service fee of $35 on average. Plus, you may need to get your spouse’s permission for a loan.

Bottom line? “The long-term benefits of not touching your retirement savings may far outweigh the short-term benefits of taking the loan,” Tolve said. “Although it may seem easy to take a loan from your plan now, there may be other alternatives with lower interest rates that are available to you. Be sure to consider the impact a loan may have on your financial future and explore other options before you borrow from your plan.”