There are at least 18 factors that need to be considered when deciding whether a client should take a 401(k) loan. Financial planners must carefully consider each of these issues in light of the client’s unique circumstances. This article introduces a method for planners to use when approaching the plan-loan question. Any examination of the inquiry of which loan best suits the client’s needs is aided by first understanding the rules governing plan loans. The considerations that compel a choice to use the 401(k) plan to provide the loan are investigated. Reasons a commercial loan may be advantageous are then considered. Finally, a deeper dive is taken to analyze the opportunity cost of having retirement funds “out of the market” when high returns occur; how the planner can avoid the repayment of a loan by reducing plan contributions and retirement readiness; and whether there is a double tax on loan repayments. The provided checklists can be used to guide planners through the decision process.
Kenn Beam Tacchino, JD, LLM, is a professor of taxation and financial planning at Widener University in Chester, PA. Professor Tacchino has won awards for both his teaching and his scholarly writing. Among other consulting activities, he conducts retirement planning seminars for employee groups.
Kathleen Wendling is a graduate assistant at Widener University while pursuing a masters of taxation and financial planning. Kathleen received her bachelor’s degree in business administration with a concentration in accounting from Widener University in Chester, PA.