If you cannot repay the money, your loan will be considered in default and the outstanding balance would be treated as a taxable withdrawal. This scenario often forces individuals to cash in more of their plan assets to make these payments, and that amount is also subject to taxes and a possible penalty. Although you are being charged a reasonable rate to borrow, you may be short-changing yourself. Of course, no one can predict whether or not the past history of the stock market will repeat itself, but you get the idea. Some plans may charge fees when you borrow from your account.
Plans can charge a one-time fee, maintenance fee, or a combination of the two.
Each plan may have different fee structures so it is important to review your plan rules before you borrow. And then there is the problem of how much can you afford each month. If things are tight, you may only be able to make the mandatory loan payments and have to forego any new contributions until you pay off the loan. Dee Lee , CFP, owns Harvard Financial Educators, an organization that conducts financial workshops for corporations and institutions across the country. The experts are not employed by Fidelity but may receive compensation from Fidelity for their services.