"Taking a loan from your 401(k) is normally a last resort reserved for emergencies," she said, noting those considering such a move must learn to separate wants from needs. "We try to work with clients to establish an emergency fund so they never have to use their retirement savings.
"We also look at what other sources of savings they have and whether any other, more favorable loans exist elsewhere," she added.
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Home improvement stores, for example, frequently offer zero-interest loans to customers for the purchase of major appliances and renovation projects. Likewise, health-care providers are often willing to work with patients to establish a low-interest payment schedule for overdue medical bills.
Other sources of capital may include home-equity loans and lines of credit for homeowners, which keep your retirement savings intact, said Scottino.
It's worth noting that many 401(k) plans provide for hardship distributions, allowing account holders who can demonstrate proof of need to take a penalty-free withdrawal before age 59½ for costs related to unreimbursed medical expenses, the purchase of a principal residence, payment of college tuition and related educational costs, payments necessary to prevent eviction, funeral expenses and repairs of damage to their principal residence.
Such withdrawals, however, are not considered a loan. Once that money is removed, you do not have the chance to repay it, and you lose forever the tax advantage of those funds. As such, financial advisors typically recommend that retirement savers utilize every other tool available, including personal loans and the 401(k) loan.