My Biggest Retirement Mistake: Borrowing From My 401(k)

Easy money. A path out of crushing mid-career debt (or at least some of it). And hey, it was my money. Why not borrow from the future? I could always pay the future back.

In the 1990s, ages before my retirement in 2023, I borrowed more than $5,000 from my 401(k) account. (My brain is keeping me safe from remembering the exact amount, or whether I doubled it with a zero-interest company loan too.)

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Oh, it was easy to rationalize at the time, and still is. Raising four kids, then all under 12 and requiring the necessities and niceties of growing up in the suburbs of central New York. Crippling credit card debt, for which I had no one to blame but the adults in the house, nipping at my heels on a daily basis and impervious to several side hustles. Even a home equity line of credit wasn’t enough of a lifeline.

Enter the retirement account. The IRS allows you to borrow up to 50 percent of your vested 401(k) balance or $50,000, whichever is less. You must repay the loan in full, with interest, over five years; if you don’t, whatever you still owe can be treated as a withdrawal, subject to incomes taxes and, if you’re below age 59½, a 10 percent IRS penalty.

Trouble was knocking on our door, and those retirement funds were just sitting there. It would be years before I needed that money. Right?

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Missing out on a bull market

I knew better. As a business journalist, I often talked to financial experts, and borrowing from your 401(k) was considered bad money management. That hasn’t changed.

“The downside is, while you take the loan, the funds are not able to grow within the 401(k),” says Rachael Camp, a certified financial planner (CFP) and founder of Camp Wealth in Denver.  “You could miss out on potential gains if the market does well while your funds are out of your 401(k). The true cost of the loan is the growth you’ll miss while the money is not invested.”

And while my funds were out of my 401(k) … the market did well. Very well.

While I was repaying my loan over the second half of the ’90s, the S&P 500 was gaining more than 28 percent a year, on average. At that rate of return, my $5,000 would have grown to around $20,000 if I’d left it alone. I don’t want to think about what that extra $15,000 would be worth now, but I know it isn’t chump change.

Niedt takes a stroll through downtown Staunton. The Shenandoah Valley city's small-town core was one of the things that attracted he and wife to move there in retirement.

Lexey Swall

To make matters worse, some 401(k) plans prevent borrowers from making new payroll contributions until their loan is repaid. So if your employer matches contributions, you miss out on that free money while you’re paying back the loan. Both of these things were true in my case, and that was haunting me too.