Career 01 March 2017
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.
6 Min Read
I live the pain and stress of being black in America every day: I am a black woman, the mother of a black son, sister to black men, and aunt to my black nephews. I remember what it was like as a young girl to be afraid to go to Howard Beach for fear of being chased out. I know what it's like to walk on Liberty Avenue and be called "nigger" and being so young that I didn't understand what the word meant, I had to ask my mother. I know too well that feeling in the pit of your stomach when a police car pulls up behind you and even though you know you haven't done anything wrong you fear that your life may be in danger from what should be a simple encounter. Like all African Americans, I am tired of this burden.
African Americans have a long history of having to fight for our humanity in America. We have had to fight for freedom, we have had to fight for equality, and we have had to fight for our lives. The fight continues to go on. I have often quoted that line from the character Sophia in Alice Walker's The Color Purple, "All my life I had to fight." When I say this to my white counterparts it can sometimes be uncomfortable because it's clear that they just don't get it. They view it as melodramatic. But it's not. It's part of the black experience, and it is the part of the black experience that black people don't want.
I have often quoted that line from the character Sophia in Alice Walker's The Color Purple, "All my life I had to fight."
While I was out yesterday, passing out PPE and talking to people, a woman asked me, "What is it going to take for this to change?" I told her that I think peaceful protesting is a good start. But it's just the start. We can't elect the same people for the past 20-30 years, some in the same positions, and then talk about how nothing has changed in the past 30 years.
This injustice, inequality, and inequity will not spontaneously disappear. It will take bold, outspoken, and fearless leadership to eradicate the systemic racism in our country. We must address the violence at the hands of a police force paid to serve and protect us. We must address the recurring experience of black people being passed over for a promotion and then being asked to train the white person who was hired. We must address the inequities in contract opportunities available to black businesses who are repeatedly deemed to lack the capacity. We must address the disparity in the quality of education provided to black students. We must address the right to a living wage, health care, and sick pay.
While we like to regard the system as broken, I've come to believe the system is working exactly as it was meant to for the people who are benefiting from it. We need a new system. One that works for all of us. I am running to become the mayor of New York City because I can't assume there's another person who has the courage to do the work that needs to be done to create a fair and just city.
We can't elect the same people for the past 20-30 years, some in the same positions, and then talk about how nothing has changed in the past 30 years.
There are some things we may not be able to change in people, but at this moment I think that whether you are black, white, purple, or yellow we all should be looking internally to see what is one thing that you can do to change this dynamic. Here's where we can start:
If we want change, we need a total reform of police departments throughout this country. That is going to require taking a hard look at our requirements to become a police officer, our disciplinary procedures when civilian complaints are filed, and a review of what and how we police. No one deserves to lose their life based upon the accusation of carrying counterfeit cash. We also need to hold police officers accountable for their actions. While it is their duty to protect and serve they should not be above the law. Even at this very moment, police officers are overstepping their boundaries.
If we want change, we have to build a sense of camaraderie between the police and community. A sense of working together and creating positive experiences. We have to be honest about the fact that we haven't allowed that to happen because we have utilized our police department as a revenue-generating entity. We are more concerned with cops writing tickets than protecting and serving. Even during these moments of protest we are witness to the differences made when the police supported the protesters and stood hand in hand with them or took a knee. It resulted in less violence and more peaceful protest. People felt heard; people felt respected; people felt like they mattered.
While we like to regard the system as broken, I've come to believe the system is working exactly as it was meant to for the people who are benefiting from it. We need a new system.
If we want change, we have to be willing to clean house. And that means that some of you are going to have to step up to the plate and take roles of leadership. In my city alone, there are 35 city council seats that are term-limited in 2021. There are some that aren't termed but maybe their term should be up. Step up to the plate and run. If nothing else it will let our elected officials see that they need to stop being comfortable and do more. We don't need you out in the street taking selfies or reporting the problems to us. We need solutions. We need you in a room implementing policies that will ensure that these things don't continue to happen.
If we want change, we need to support grassroots candidates that are not in corporate pockets, who are not taking PAC money, and who really want to make a difference to their community. We need candidates that know first-hand and can relate to the experiences that many of us are going through.
We are at a pivotal moment. It is inspiring to see people from all races and backgrounds in the streets protesting, standing up for justice, and wanting to see change. We must seize this moment, but we must also be mindful that change requires more.
People often ask me why I decided to run for office? I am running for me. I am running for the little girl that was called nigger on Liberty Avenue. For the woman who has been pulled over for no reason. For my nephew who was consistently stopped during the era of stop and frisk. I am running for your son, your brother, and your nephew. I am running so that the next generation will never have to say, "All my life I had to fight." Because although we won't stop until we see justice and changes that address inequality and inequity effectively, this fight is exhausting.