Using a 401k as your "bank"...

It's easy to rationalize pawning your home equity, the money in your 401(k), TSA, or any other equity based investment to satisfy immediate cash needs.  It is rarely a good idea but there may be circumstances where it could make some sense.  Each type of equity investment has different and disparate characteristics so this article only discusses using a 401(k) as a "bank."

Yes.  And no.

First a "no."  Your 401(k) retirement account aims to provide income during retirement.  It doesn't work as well when you attempt to use it as a "bank."  Some 401(k) plans have loan provisions that allow you to borrow some percentage of your accumulated and vested balance.  Usually plans let you access about 50% of your balance.  Some plans impose few restrictions on the use of borrowed funds.  Frequently, however, loans are restricted to specific uses such as home loans, tuition, or medical expense.

Now a "yes."  There are occasions - rare occasions - when using your retirement account as a "bank" can make sense.  If you find yourself in dire need - perhaps  a child's or spouse's or your own health is at risk and you need money to pay for uncovered medical expense and you have no other resources -  a loan from yourself to yourself using retirement money could make sense.  The 401(k) plan normally dictates repayment terms for these type loans.  If the terms are just right, you may actually gain value in your plan when you take out a loan.  You could possibly get better returns paying yourself interest than the returns from your investment options would deliver.

You do, however, create a risk by doing this.  If you leave your employer for any reason before you repay the loan, you will have either to repay the loan in full or recognize the unpaid balance as ordinary income in the year of your termination.  You may also have to pay a ten percent penalty for having taken the money out of your account prior to age 59 ½.

Now, another "no."  Whenever you create risk for your money, you must have a great reason for doing so.  When the money you are risking is already at risk in an investment account, you are doubling your exposure.  That just doesn't make sense except in extraordinary situations.

Finally, recognizing that you can use your retirement account as a "bank" is a step in the direction of recognizing that having a "bank" is important.  The vehicle you choose is also important.  Choose whole life insurance and you will be choosing wisely.