8. 401(k) and Other Retirement Plan Loans

It sounds like a great deal: Borrow from your retirement fund and pay back yourself instead of a bank. You get a great interest rate, and the loan doesn’t show up on your credit report or affect your credit score.

Plenty of people take the bait. About one in four participants in large-company 401(k) plans had a loan outstanding, according to research firm Aon Hewitt. The average loan balance at the end of 2010 was $7,860, or 21% of these participants’ total plan assets.

But borrowing money from retirement plans is fraught with hazards—so many that most people should look elsewhere if they need funds. A loan or, worse yet, a withdrawal from a retirement fund typically should be a last resort, something ...

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