Think twice before taking a 401(k) loan

Considering a loan from your Hewlett Packard Enterprise 401(k) Plan? While it may sound like a good idea to borrow from your own savings, consider the short- and long-term effects a loan could have on your overall retirement savings.

In the short-term:

• If you're already short on cash, repaying the loan could be a financial burden, because repayments will be deducted directly from your paycheck.
• Your monthly take-home pay and disposable income may be lower.
• You may have less to save—for retirement and for shorter-term needs (car, vacation, etc.).

In the long-term:

• Any money you borrow from the Hewlett Packard Enterprise 401(k) Plan reduces your account balance and limits your potential for accumulating retirement income. This could result in your having to work longer to help rebuild your nest egg.
• You'll have less to invest for possible growth.
• You'll miss out on the benefits of tax-free compounding, which is key to building up a substantial 401(k) balance over time.
• You'll be taxed twice if you borrow untaxed money from your 401(k)—for example, pre-tax contributions and possible investment earnings on that money (see Did you know? below).

Financial experts suggest you should think of your 401(k) as "hands off" until retirement. But, if you do decide to take a loan, you should be aware of the Hewlett Packard Enterprise 401(k) Plan loan provisions:

• The minimum amount you can borrow is $1,000. The maximum amount you can borrow varies based on your vested account balance—if your vested account balance is $2,000-$99,999, you can borrow up to 50% of your balance. If your vested account balance is $100,000 or above, the maximum amount you can borrow is $50,000.
• The loan repayment period for general purpose loans is up to five years, or up to 15 years if the loan is for the purchase of a primary residence.
• You can have up to three outstanding loans at a time (only one outstanding primary residence loan is allowed).
• There is a $50 loan initiation fee for each loan.
• Any outstanding loan balances taken over the previous 12 months may reduce the amount you have available to borrow.

As an alternative to a 401(k) loan, you may want to consider:

• Special mortgage arrangements available to first-time home buyers
• Conventional consumer loans—offered by banks and other commercial lenders
• Home equity loans—borrow against the current value of your primary residence to make a purchase or consolidate your debt. Unlike credit cards and conventional loans, the interest is tax deductible
• Special promotional offers made by automakers, airlines, stores, and other lenders to entice consumers to make a purchase (e.g., 0% interest for one year; discount off the purchase price if you use your credit card; membership miles on every purchase, etc.). Note: These incentives are only a good “deal” if you pay back the loan before the higher interest rate kicks in.

Regardless of whether you apply for a loan from the Hewlett Packard Enterprise 401(k) Plan or any other source, always be sure that you understand the fine print—the terms of the loan and, especially, the “what ifs”—before you sign on the dotted line.

Be sure you understand the plan guidelines and impact of taking a loan before initiating a loan from your plan account.

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