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Should You Tap into Your 401(k) To Cover Your Debts?

Career

You know the expression about something being too good to be true? That’s the case when it comes to borrowing from your 401(k). This might seem like a good idea when it comes to making a large purchase or paying off debt, but there are consequences. You are not just borrowing from yourself. Because of the effects of compound interest, you’re actually borrowing from your future self, and robbing yourself of the blissful retirement you deserve. And why would you want to do that?


If you are thinking of borrowing from your 401(k), here are some important things to consider first.

You’re Missing Out on Money

Interest rates on 401(k) loans can be very appealing. You have the ability to borrow your own money and pay interest to yourself rather than a bank. Seems like a good deal, right? But not only are you missing out on the effects of compound interest, but the market may end up making money.

What this means is when you take out a loan you’re actually selling your assets. Then, when you go to repay your loan, you may end up buying shares in a fund at a higher price.

It is also important to note that if you’re unable to repay your loan within the time frame allowed, your loan will be considered an early withdrawal. This mean you will pay a 10% penalty if you are under the age of 59 ½ and have to pay extra income tax.

You Get Taxed Twice

For a traditional 401(k) plan, you make contributions with pre-taxed dollars. You won’t actually pay any taxes until you withdraw from your account as income during retirement. However, by borrowing from your fund, you will effectively be taxed twice. This is because you’d be paying back the loan with after-tax dollars. Then, when you wish to withdraw during retirement, you will be taxed again.

You Can’t Make Contributions Until the Loan is Repaid

Typically, most 401(k) plans will not let you continue to contribute money until you have repaid the full amount you have borrowed. Since this could take years, this means missing out on years of potential contributions (and the effects of compounding interest). You will miss out on the growth and interest you would have accumulated had you just left your money where it was.

It Could Be Risky

If for some reason you stop working or are let go by your employer, you may be required to repay the loan in full within 60 days. If you cannot meet the payment obligation, your loan will be considered an early withdrawal and you’ll have to pay the 10% penalty as well as income taxes! Talk about a big blow to your bank account!

You’re Stealing from Yourself to Pay Someone Else

By using your 401(k) to pay off debt, you are essentially just moving your debt around, as you will still have a loan that needs repaying. Some see this as a better option than paying a bank because interest rates are lower. However, even if you pay your loan back on time, you will have lost out on maximizing the effects of compounding interest. You are really just robbing from your future self.

Now you can see why taking a loan on your 401(k) may not actually be a great idea. While it may seem like an easy way to access immediate funds, you’re only hurting yourself. Instead, make a plan to save for a big purchase or develop a debt repayment plan that doesn’t involve needing to dip into your 401(k). With proper planning and a little patience, there are usually ways to reach your goals without compromising your future.

7min read
Culture

The Middle East And North Africa Are Brimming With Untapped Female Potential

Women of the Middle East have made significant strides in the past decade in a number of sectors, but huge gaps remain within the labor market, especially in leadership roles.


A huge number of institutions have researched and quantified trends of and obstacles to the full utilization of females in the marketplace. Gabriela Ramos, is the Chief-of-Staff to The Organization for Economic Co-operation and Development (OECD), an alliance of thirty-six governments seeking to improve economic growth and world trade. The OECD reports that increasing participation in the women's labor force could easily result in a $12 trillion jump in the global GDP by the year 2025.

To realize the possibilities, attention needs to be directed toward the most significantly underutilized resource: the women of MENA—the Middle East and North African countries. Educating the men of MENA on the importance of women working and holding leadership roles will improve the economies of those nations and lead to both national and global rewards, such as dissolving cultural stereotypes.

The OECD reports that increasing participation in the women's labor force could easily result in a $12 trillion jump in the global GDP by the year 2025.

In order to put this issue in perspective, the MENA region has the second highest unemployment rate in the world. According to the World Bank, more women than men go to universities, but for many in this region the journey ends with a degree. After graduating, women tend to stay at home due to social and cultural pressures. In 2017, the OECD estimated that unemployment among women is costing some $575 billion annually.

Forbes and Arabian Business have each published lists of the 100 most powerful Arab businesswomen, yet most female entrepreneurs in the Middle East run family businesses. When it comes to managerial positions, the MENA region ranks last with only 13 percent women among the total number of CEOs according to the Swiss-based International Labor Organization (ILO.org publication "Women Business Management – Gaining Momentum in the Middle East and Africa.")

The lopsided tendency that keeps women in family business—remaining tethered to the home even if they are prepared and capable of moving "into the world"—is noted in a report prepared by OECD. The survey provides factual support for the intuitive concern of cultural and political imbalance impeding the progression of women into the workplace who are otherwise fully capable. The nations of Algeria, Tunisia, Morocco, Libya, Jordan and Egypt all prohibit gender discrimination and legislate equal pay for men and women, but the progressive-sounding checklist of their rights fails to impact on "hiring, wages or women's labor force participation." In fact, the report continues, "Women in the six countries receive inferior wages for equal work… and in the private sector women rarely hold management positions or sit on the boards of companies."

This is more than a feminist mantra; MENA's males must learn that they, too, will benefit from accelerating the entry of women into the workforce on all levels. Some projections of value lost because women are unable to work; or conversely the amount of potential revenue are significant.

Elissa Freiha, founder of Womena, the leading empowerment platform in the Middle East, emphasizes the financial benefit of having women in high positions when communicating with men's groups. From a business perspective it has been proven through the market Index provider MSCI.com that companies with more women on their boards deliver 36% better equity than those lacking board diversity.

She challenges companies with the knowledge that, "From a business level, you can have a potential of 63% by incorporating the female perspective on the executive team and the boards of companies."

Freiha agrees that educating MENA's men will turn the tide. "It is difficult to argue culturally that a woman can disconnect herself from the household and community." Her own father, a United Arab Emirates native of Lebanese descent, preferred she get a job in the government, but after one month she quit and went on to create Womena. The fact that this win-lose situation was supported by an open-minded father, further propelled Freiha to start her own business.

"From a business level, you can have a potential of 63% by incorporating the female perspective on the executive team and the boards of companies." - Elissa Frei

While not all men share the open-mindedness of Freiha's dad, a striking number of MENA's women have convincingly demonstrated that the talent pool is skilled, capable and all-around impressive. One such woman is the prominent Sheikha Lubna bint Khalid bin Sultan Al-Qasimi, who is currently serving as a cabinet minister in the United Arab Emirates and previously headed a successful IT strategy company.

Al-Qasimi exemplifies the potential for MENA women in leadership, but how can one example become a cultural norm? Marcello Bonatto, who runs Re: Coded, a program that teaches young people in Turkey, Iraq and Yemen to become technology leaders, believes that multigenerational education is the key. He believes in the importance of educating the parent along with their offspring, "particularly when it comes to women." Bonatto notes the number of conflict-affected youth who have succeeded through his program—a boot camp training in technology.

The United Nations Women alongside Promundo—a Brazil-based NGO that promotes gender-equality and non-violence—sponsored a study titled, "International Men and Gender Equality Survey of the Middle East and North Africa in 2017."

This study surveyed ten thousand men and women between the ages of 18 and 59 across both rural and urban areas in Egypt, Lebanon, Morocco and the Palestinian Authority. It reports that, "Men expected to control their wives' personal freedoms from what they wear to when the couple has sex." Additionally, a mere one-tenth to one-third of men reported having recently carried out a more conventionally "female task" in their home.

Although the MENA region is steeped in historical tribal culture, the current conflict of gender roles is at a crucial turning point. Masculine power structures still play a huge role in these countries, and despite this obstacle, women are on the rise. But without the support of their nations' men this will continue to be an uphill battle. And if change won't come from the culture, maybe it can come from money. By educating MENA's men about these issues, the estimated $27 trillion that women could bring to their economies might not be a dream. Women have been empowering themselves for years, but it's time for MENA's men to empower its women.