Most company 401(k) retirement savings programs allow qualified participants to borrow money from their account. Usually the amount is limited to a maximum of 50% of the account balance, requires timely repayment, and immediate repayment of outstanding loans should you leave your employer. So is borrowing money from your 401(k) retirement account a good idea?

Why these loans are usually a bad idea
In most cases, borrowing money from a 401(k) is a bad idea. Why?

Opportunity cost. Your investments used for a loan from your 401(k) are no longer earning investment income. Instead it is usually earning a lower interest rate paid by you as you repay your loan.

Tax implications. Your repayment of the loan is usually in "after-tax" dollars. If you are in the 25% federal tax bracket you need to pay $1,250 dollars pre-tax for every $1,000 you borrowed BEFORE applying the interest expense.

Cash Flow. Often those taking out a loan are cash strapped. This loan too, must be repaid within 5 years unless used to buy a home. Have you done the math to ensure you will have cash available to make these new loan payments each month?

Tax penalty. If you do not pay the loan back, you will often be subject to two more tax events. The first is income tax on the unpaid 401(k) loan amount as it is now deemed to be ordinary income. The second is a possible 10% tax penalty for unqualified early withdrawal. In other words, if you miss a payment or two, the tax implications could be huge.

Immediate repayment. If you leave your employer, these loans are often immediately due in full within 60 days of leaving your employer. So if you lose your job or wish to change your job you need to be prepared to repay any 401(k) loan balances immediately.

401(k) Loans have Congressional Attention
The increase in use of 401(k) loans and defaults on these loans has captured the attention of our legislators. There is a new bill introduced in the Senate this year called the "SEAL 401(k) Savings Act". If passed the act would:

What's Currently in Place

Since the passage of the Health Care Reform bill a number of the provisions have been implemented and a number are scheduled to be put in place within the next 24 months. Here, in a nutshell, is a list of the major components that are now law and those that will be shortly:

Year: 2010

	10% excise tax on indoor UV tanning services: July 1, 2010
	Health care coverage expansion to children under the age of 27: March 30, 2010
	Medicare Part D Coverage Gap (donut hole) $250 rebate
	Small business health care tax credit

Year: 2011

	Elimination of over-the-counter medicines as a reimbursable expense from Flexible Spending Accounts or other health reimbursement arrangements like HSAs without a prescription.
	Optional employer reporting of the cost of employer-provided health insurance coverage on employees' W-2s
	Repeal of additional 1099 informational reporting, but increasing the penalties for late filing of 1099s

The next major block of legislation goes into place in 2013 and 2014 so stay tuned!