Taking 401(k) loans during the pre-retirement years represents perhaps the worst possible timing for retirement account borrowing. With retirement approaching within 5–10 years, these should be peak savings years, not borrowing years.

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Key considerations:

• Compound growth opportunity has narrowed significantly. Every dollar borrowed loses irreplaceable final growth years. For example, someone age 60 borrowing $30,000 may lose $10,000 in growth before retiring at 65, directly reducing retirement income capacity.

• Job-change risk peaks during this period due to age discrimination, corporate restructuring, early retirement incentives, or health issues forcing earlier-than-planned retirement.

• Most plans require full repayment within 60 days of employment termination. This becomes especially problematic as voluntarily finding new employment is less likely with age.

• If repayment cannot be made, forced distribution converts to taxable income plus a 10% penalty if under age 59½, creating a devastating reduction in retirement savings precisely when there is no time to recover.

 

This life stage demands absolute protection of retirement accounts.

• Catch-up contributions ($7,500 for 401(k)s, $1,000 for IRAs) provide a final opportunity to boost retirement readiness—borrowing contradicts this goal.

 

If facing financial pressure during pre-retirement years, explore every alternative:

• Reduce spending dramatically

• Delay major purchases until retirement funds are accessible

• Tap home equity only if absolutely necessary

 

The psychological impact of entering retirement knowing you sabotaged your own retirement security is substantial. Protect these accounts at all costs—they represent your future financial independence.