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Just because you can obtain a loan from your plan doesn't mean it is
always the best idea. So before sticking your hand in the cookie jar,
you should consider the "pros and cons," some of which may surprise
you. And remember, the purpose of a 401k plan is to fund your
retirement, so don't shortchange your golden years by treating it as a
checking account.

The Pros:

1. It's convenient. There
   is no credit check or long credit application form. Some plans only
   require you to make a phone call, while others require a short loan
   form.
2. There is a low interest rate. You pay the rate set by the plan, usually one or two percentage points above the prime rate.
3. There usually are no restrictions. Most plans allow you to borrow for any reason.
4. You are paying the interest to yourself, not to the bank or credit card company.
5. The
   interest is tax-sheltered. You don't have to pay taxes on the interest
   until retirement, when you take money out of the plan.
6. You choose where the money comes from. The advantage of
   being able to choose which investment option you will sell in order to
   obtain the funds for your loan is that you can leave untouched those
   investments with the best performance.

1. There are
   "opportunity" costs. According to the U.S. General Accounting Office,
   the interest rate paid on a plan loan is often less than the rate the
   plan funds would have otherwise earned.
2. Smaller contributions. Because you now have a loan payment,
   you may be tempted to reduce the amount you are contributing to the
   plan and thus reduce your long-term retirement account balance.
3. Loan defaults can be harmful to your financial health. If
   you quit working or change employers, the loan must be paid back right
   away. It's not uncommon for plans to require full repayment of a loan
   within 60 days of termination of employment. If you can't repay the
   loan, it is considered defaulted, and you will be taxed on the
   outstanding balance, including an early withdrawal penalty if you are
   not at least age 59 ½.
4. There may be fees involved.
5. Interest on the loan is not tax deductible, even if you borrow to purchase your primary home.
6. You have no flexibility in changing the payment terms of your loan.

It is probably not wise to take out a 401k plan loan when:

1. You are planning to leave your job within the next couple of years.
2. There is a chance you will lose your job due to a company restructuring.
3. You are nearing retirement.
4. You can obtain the funds from other sources.
5. You can't continue to make regular contributions to your plan.
6. You can't pay off the loan right away if you are laid off or change jobs.
7. You need the loan to meet everyday living expenses.
8. You want the money to purchase some luxury item or pay for a vacation.