Let's define 'serious liquidity need' as not including a sudden yearning for a 42-inch flat-screen TV.Why is your 401(k) an attractive source for such loans? It can be the quickest, simplest, lowest-cost way to get the cash you need. Let's define 'short-term' as being roughly a year or less. When you must find cash for a serious short-term liquidity need, a loan from your 401(k) plan probably is one of the first places you should look.
Let's take a look at how such a loan could be used sensibly and why it need not spell trouble for your retirement savings (For related reading, see Eight Reasons To Never Borrow From Your 401(k).) Clearly, these loans have a following and, in fact, they can be appropriate in some situations. This statistic has held true since the early 2000s. According to a study by the Employee Benefits Research Institute (EBRI), nearly 20% of all 401(k) participants had plan loans outstanding. However, this idea may be more urban myth than reality. Some members of the financial press would even have you believe that taking a loan from a 401(k) plan is an act of robbery committed against your own retirement. The financial media has coined a few pejorative phrases to describe the pitfalls of borrowing money from a 401(k).
