Coming Out . . . Going In |
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When you borrow from your 401(k), the money usually comes out of your account balance. In many plans, the money is taken in equal portions from each of the different investments. So, for example, if you have money in four mutual funds, 25 percent of the loan total comes from each of the funds. In other plans, you may be able to designate which investments you’d prefer to tap to put together the total amount.
 The advantage of being able to choose is that you can leave the investments providing the strongest performance untouched, provided that you have enough money in other plan investments to equal the amount you want to borrow. Of course, since there is no way to predict market performance, you might choose to take money from poorly performing stock funds only to find that those funds were about to regain their strength. Then, having suffered losses, you would also miss out on gains.
The loan money you repay is reinvested. But how and when that occurs differs from plan to plan. Many plans reinvest when your payment is made. But other plans create a loan fund to receive your payments and those of other borrowers. In that case, the principal and interest may go back into your own account only when the full loan has been repaid. As a result, your earning potential may be less than with direct repayment. That’s one of the things you should check when considering a loan.
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