Q & A
My wife and I are going to do an addition to our house. We’re both 45 years old and have plenty of equity to support $400,000 of borrowing. I was thinking of borrowing from our 401(k) plans. We could pay the interest back to ourselves. My wife is concerned that we will lose the tax deduction and, if something happens, we have no retirement. What are your thoughts?
Answer: Listen to your wife; she’s clearly a wise woman. Borrowing from a 401(k) plan almost never makes sense. It’s an emergency step, not something for daily life. As a practical matter, the interest rate on home equity credit lines is currently only a bit higher than the inflation rate. In addition, the interest is tax deductible. It is possible that the net, after-tax cost of borrowing will be about the same as the inflation rate. In effect, the cost of borrowing will be zip. Keep your powder dry in your 401(k) accounts, leaving flexibility for a real emergency, should one arise.
Source: Scott Burns, StatesmanJournal.com - January 25, 2014
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