Taking loans from 401(k) accounts during less active retirement is generally discouraged and often not permitted once you’ve separated from employment. Most plans require active employment to qualify for loans, making this option unavailable to many retirees.

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If you are still working part-time and your plan allows loans, proceed with extreme caution:

• You are borrowing from your retirement nest egg during critical years when those funds should be growing through compound interest

• Loans must typically be repaid within five years, creating required monthly payments that strain fixed retirement income

• Failure to repay on schedule converts the outstanding balance into a taxable distribution, potentially pushing you into a higher tax bracket and triggering a 10% early withdrawal penalty if under age 59½

• You repay the loan with after-tax dollars for money that was originally contributed pre-tax

 

Opportunity Cost:

• Borrowed funds miss out on potential market gains during the loan period, which can significantly reduce your retirement nest egg

 

Guidance:

• Use 401(k) loans only as a last resort, after exhausting all other borrowing options and alternatives