The 401k plan is ubiquitous when it comes to retirement planning -- millions of Americans regularly contribute to them. 401ks are pretty iron-clad savings vehicles as it can be difficult to withdraw money prior to your retirement age without hefty penalties and tax consequences.\r\n\r\nHowever, many employers do actually allow employees to take out loans from their 401k accounts. And people take advantage of this -- about 20% of plan participants currently have an outstanding 401k loan, according to the Employee Benefits Research Institute (EBRI).\r\n\r\nBut is taking a loan against your 401k really a good idea? Let\u2019s take a closer look and explore what your options are when it comes to borrowing against your 401k.\r\n\r\nDoes it Make Sense?\r\nLet\u2019s address the elephant in the room first: Is it ever a smart idea to borrow money from your 401k? After all, the primary purpose of contributing to a 401k for most people is to save money for retirement. Could you be jeopardizing your financial security if you take out a 401k loan before you retire?\r\n\r\nWe generally say that yes, you possibly could put your future retirement security in danger. In fact, this is probably the biggest drawback to taking out a 401k loan. Borrowing money from your 401k means that you miss out on the potential earnings that could have accumulated in your account due to the long-term compounding of returns. We usually advise clients that the opportunity cost of borrowing against your 401k is simply not worth it in the long run and can have serious negative consequences on your ability to meet your retirement goals. To see what compounding interest can mean for your retirement nest egg over time, see \u201cThe Average 401k Balance by Age.\u201d\r\n\r\nAnother reason that you should really avoid borrowing against your 401k if at all possible is that if you leave your job or are terminated before you\u2019ve repaid the loan, you might have to pay income taxes and a penalty on the outstanding loan amount (if you are younger than 59\u00bd years of age).\r\n\r\nThe Lowdown on 401k Loans: How do They Work?\r\nWhile we almost always recommend against 401k loans, if you absolutely must borrow against your 401k, you\u2019ll be glad to know that the interest rate is usually less than the rate on some other types of consumer loans. And since the interest accrues in your account balance, you\u2019re paying it to yourself, not to a bank or other lender.\r\n\r\nFilling out a 401k loan application can often be done online in a matter of minutes and the process doesn\u2019t generate a credit inquiry or impact your credit score. There\u2019s also a lot of repayment flexibility: IRS regulations require that 401k loans be repaid according to a five-year amortization schedule, but you can repay the loan faster if you want through payroll deductions.\r\n\r\nIn general, you can borrow up to $50,000 from your 401k or 50% of your vested account balance, whichever is less. There are no restrictions on the purpose for a 401k loan, so you can use the money for any reason you choose.\r\n\r\nSome Reasons People Decide to Take a 401k Loan\r\n\r\nThey need money for a home down payment.Saving up enough money for the down payment is one of the biggest obstacles many people face when buying a home. Due to special rules that allow more than 5 years to pay back a 401k loan used for a down payment, some people opt to tap their retirement savings for this purpose. However, buying a house may not always be the wisest financial decision, especially if you have to use your retirement funds to fund the purchase. For more on that, read our article "Renting vs. Buying: What's the Smarter Move?"\r\nThey're coming up short on college savings.With student loan debt in the U.S. now exceeding $1.5 trillion, many parents are hoping to save enough for college that their kids can graduate debt-free. Some parents opt to use their 401k funds to help pay college costs, but we strongly advise against this. Remember, you can always borrow for education, but you can\u2019t borrow for retirement. And you won\u2019t be much help to your kids if you run out of money in retirement!\r\nThey need to make major home improvements or repairs.Many people use home equity loans and lines of credit (or HELOCs) for these purposes, but some people decide to take a loan from their 401k instead because HELOC\u2019s usually have adjustable interest rates. However, we\u2019d still advise caution here because again, the opportunity cost from taking money out of your 401k will almost always be too costly to your retirement savings.\r\nThey are facing large out-of-pocket medical expenses.Higher deductibles and copays mean large out-of-pocket medical costs for many people today, so this is another reason many folks seek out 401k loans.\r\n\r\n\r\nOur Take: Weigh the Pros and Cons\r\nThere are pros and cons to borrowing money from your 401k that you should carefully consider before taking any action. However, as fiduciaries (which means we are legally obligated to act in your best interest), we would generally advise against taking a loan out against your 401k \u2013 it is usually just too costly, as missing out on compounding interest can make a much bigger dent in your retirement savings than you might imagine.\r\n\r\nBut everyone\u2019s situation is unique, so your financial advisor can help you decide what will work best for your specific circumstances. \r\n\r\nNeed to talk to someone about a 401k loan or other financial concerns? Click here to see the wealth management services we offer here at Personal Capital.\r\n\r\nPersonal Capital Advisors Corporation is an investment advisor registered with the Securities and Exchange Commission ("SEC"). Any reference to the advisory services refers to Personal Capital Advisors Corporation. Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.\u200b Past performance is not a guarantee of future return, nor is it necessarily indicative of future performance. Keep in mind investing involves risk.