Here’s when a 401(k) loan actually ‘makes sense,’ says advisor

Taking out a loan against your 401(k) savings is generally a bad idea — but using the money as a short-term “bridge loan” may be an exception, according to Blair duQuesnay, a certified financial planner in New Orleans.

“I’ve always been very anti-401(k) loans,” duQuesnay said. “However, I find there are some things that make sense.”

In fact, they recently used this strategy when buying a new home. DuQuesnay, an investment advisor at Ritholtz Wealth Management and a member of the CNBC Advisory Board, uses a 401(k) loan as a short-term pot of cash for a down payment.

Borrowing against retirement savings becomes a bridge loan that duQuesnay plans to repay after selling her old home. They don’t intend to sell until after they move out and make some repairs.

This may be a good strategy for those whose budgets can absorb monthly mortgage and 401(k) loan payments, he said.

Federal law allows workers to borrow up to half of their 401(k) balance, capped at $50,000.

Most people should avoid borrowing from their retirement savings if they can avoid it, however, duQuesnay cautions.

When taking any kind of loan, it is generally wise to buy assets “good” – that, like a house, that is expected to appreciate in value over time, duQuesnay said. Conversely, a car loan is an example of a loan for a “bad” asset because the car depreciates over time. Home equity is also generally the biggest store of wealth in retirement, he added.

Retirement savers shouldn’t have to borrow from their 401(k) to meet their day-to-day cash flow needs, which would speak to a broader budget problem, he said.

Of course, there are downsides to 401(k) loans, duQuesnay said.

For example, you take that money out of the stock market – which means you’ll lose investment income during the payback period, which can generally be up to five years.

Even if you pay it back with interest, the loan still represents a monthly cash flow crisis.

Furthermore, if you are laid off or looking for a new job, most employers will require you to repay the outstanding balance shortly after termination. Failure to do so may result in income tax and, depending on your age and circumstances, a tax penalty.

Some but not all 401(k) plans allow savers to continue making 401(k) contributions in addition to loan and interest payments, duQuesnay said.