Should you borrow against your 401K?

We know it’s tempting, but DON’T DO IT!

We know that we’re all in the midst of a very difficult economy. Most of us have felt a serious pinch in the pocketbook lately. During these times, please fight the temptation to borrow against your 401K. For one thing, it’s probably not worth what it was just a year ago and if you make a withdrawl your’e doing it with very depreciated funds in your account. Secondly, as if Uncle Sam doesn’t get enough of our hard-earned money…. Here’s an example of how you can be taxed twice for the same money.

Suppose you borrow $10,000 from your 401k. You’re borrowing pre-tax money, right? (One of the benefits of having a 401k) You need to pay back that money, of course … but when you pay it back, you’re paying it back with AFTER-tax money – money that you’re getting taxed on that year. BUT here’s the kicker: When you take out that money when you retire, you pay tax on it once again. Ouch!! So, please give careful consideration when thinking that borrowing against your 401K is a good idea. It has more tax implications than meet the eye, on the surface.

Please feel free to contact E-File Florida at 954-583-8534 or visit us on the internet at http://www.efileflorida.com for more great tax tips and articles.

IRS CIRCULAR 230 Required Notice – IRS regulations require that we inform you as follows: Any Federal tax advice contained in this communication (including any attachments) is not intended to be used and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction as tax related matter(s).