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Q: I have thought about taking $50,000 out of my 401(k) to pay off my second mortgage. My thought behind this is that I will be paying myself the interest rather than the bank. I have calculated what the payment would be and can afford this. Why does this sound too good to be true?

DEBT ADVISOR

Here is a summary of his reply:

Not since my cousin Glenn turned down a job with Microsoft in the ’70s to work for a credit union for $500 more a year have I heard such a bad idea.

It sounds too good to be true because it is, especially if you consider losing upward of $100,000 in retirement savings a bad thing.

Now, to avoid “Glenn’s Folly,” let’s see what the future holds.

The most damaging disadvantage of borrowing from your retirement plan is the loss in future growth of your retirement fund.

For example, let’s say you borrow $50,000 that you pay back in five years with 7 percent interest.

You are eligible to retire in 20 years.

Your fund will be short a net $110,673 at retirement because of the loan.

If that’s not bad enough, let’s consider one of life’s inevitable curveballs: If your job gets eliminated, your loan then becomes due in full and you are unable to repay the loan, then the loss increases to $431,404 because of taxes and penalties.

That $50,000 loan seems a little more costly now, doesn’t it?

Repayment of the loan is with after-tax dollars, so you will pay taxes twice on the same money.

On some plans, you might not be able to make contributions with an outstanding loan, which will hurt the bottom line even more.

The entire balance of the loan must be repaid in 60 days if you leave your job voluntarily or involuntarily.

You are robbing your retirement to pay for today’s living expenses.

I would, however, recommend you spend time researching all your options before borrowing.

My advice is to keep paying off that second mortgage with today’s money and leave retirement money alone.

-Adam

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