So why shouldn’t you borrow from your 401(k) plan? The most important reason is probably psychological. Your 401(k) plan is intended to help fund your retirement. It shouldn’t be used as a piggy bank to dip into every time you need money. If you’re serious about your retirement plans, the money in your 401(k) plan should be allowed to grow over the years. Even though you are paying the loan back to your 401(k) plan, investments were sold to provide you with the loan proceeds. While the loan is outstanding, you forego tax-deferred investment growth on that money.

There are other concerns as well. The loan payments must be made on time or the loan is considered a distribution, subject to ordinary income taxes and the 10% federal income tax penalty. If you are laid off, you might have trouble making those payments. And if you lose your job or change jobs, the entire outstanding principal must be repaid in a relatively short time or it will be considered a distribution. You also want to ensure that the amount of the loan repayment won’t cause you to reduce or eliminate new 401(k) contributions.

Consider other loan options instead. If you have equity in your home, look into a home-equity loan. Interest rates on home-equity loans tend to be comparable to rates on 401(k) loans. In addition, the interest paid on the home-equity loan is typically tax deductible if the loan balance is less than $100,000. Since interest paid on a 401(k) loan is not tax deductible, a home-equity loan may actually have a lower after-tax cost.