Should you borrow from your tax-deferred retirement account? The thought of effectively borrowing from yourself and paying yourself back can be enticing but borrowing from a retirement plan has drawbacks, too.
Tax consequences. Anyone who defaults on a loan will have taxable income from the distribution. Such a default may be triggered whenever the borrower misses an installment payment. The entire outstanding loan balance may become taxable income at that time, so borrowers have to be extremely careful.
If you borrow from a qualified plan, you should arrange to have loan repayments withheld from your paychecks.
If you part from your employer and no longer participate in the plan, you must repay the loan or take the unpaid balance as taxable income.
Legal hurdles. Another disadvantage of plan loans applies if you borrow to buy a home. The retirement plan will be a lien holder on your personal residence, if the loan is secured by the house.