Owning a home always involves home improvement projects sooner or later. Perhaps you’ve got expensive repairs that need to be taken care of, or maybe you’re longing to update your bathrooms, flooring, kitchen or windows. You may be wondering how you’re going to pay for all your home improvement costs. If you participate in a 401(k) plan at your job, you may already have the cash available. 401(k) loans are not the best choice for everyone, however. Read on to learn the advantages and risks of borrowing against 401(k) plans.

401(k) Loan Basics

Most 401(k) plans allow you to borrow from yourself. You can borrow money for a variety of purposes from home improvements to buying a home. Here are some important facts regarding 401(k) loans:

• Most plans allow you to borrow up to $50,000, or half the balance in your 401(k), whichever is less.
• You’ll probably have to repay the loan within five years. However, if you are using your loan toward the purchase of a home, you should be given a longer payback period.

Some Advantages of Borrowing from 401(k) Plans

If you choose to borrow from 401K plans for your home improvement financing you’ll enjoy some distinct advantages. Some of these benefits are the following:

• By borrowing from yourself, you avoid the penalties you’d incur by simply withdrawing the money.
• Since you are borrowing from money you already have, you don’t have to go through any credit checks or approval process.
• You can often borrow with a short form or just a phone call.
• You don’t owe tax on the interest until you withdraw your 401(k) funds at retirement.
• You pay all the interest back to yourself; no third party profits from your loan.
• You should have your cash within about a week of applying.
• You’ll typically pay just a few points above the prime rate.

Some Disadvantages of 401(k) Loans

While borrowing from your 401(k) seems like a very attractive choice at first glance, it isn’t always the best method of home improvement financing. Before taking out a 401(k) loan, consider these disadvantages:

• 401(k) loans are not tax deductable.
• If you can’t pay back your loan, you’ll have less to live on when you retire.
• If you can’t repay your loan, the IRS will consider it a premature distribution and you’ll owe taxes plus a 10 percent penalty if you are younger than 59 and a half.
• If you leave your job, you’ll have to pay back the whole balance within 60 days or face serious tax consequences.
• Repayment of the loan is through payroll deduction, so your take-home pay will decrease.
• The growth of your retirement fund is slowed until you pay back your loan.