401(k) loan, good or bad idea?

Your 401(k) allows you to take loans up to a certain percent of your account value. Typically the loan has to be repaid over a 5 year period through payroll deductions at an interest rate set by the 401(k) plan ( usually around 6%).

Often I have clients tell me that they don't view these loans as "bad" bc they are paying themselves back the 6% into their accounts. This is true, however, things to consider when you are repaying back your own money:

1) Since the loan is being paid back with AFTER TAX money through your payroll deductions, you end up paying tax twice to Uncle Same; once on the loan repayments, then again when you take out the money out as income during retirment
Ex: Your 401(k) is $100,000 and you take a loan of $20,000 @6% ( your 401k is now worth $80,000). You pay it back with after tax payroll deductions each paycheck. So you eventually have the $100k plus some interest back in your 401(k), but in later years that $20,000 that you already paid taxes on you will pay taxes on again when you take withdrawals after 59 1/2 as 100% of the account is taxable

I don't like to pay taxes twice on my money, do you?
2) Opportunity cost- if you take $20,000 out you miss the opportunity for it to grow
3) Most people don't notice this in the fine print, but....If you leave your company while your 401(k) loan is still outstanding, you are forced to pay off the loan, and if you are under 59 1/2 you will be forced to pay a 10% penalty and ordinary income taxes ( average 15% lets say )= 25% penalty..ouch!

So if you can avoid it, 401(k) loan not the best idea...