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Chapter 17. Borrowing from Yourself > Borrowing from Other Sources - Pg. 172

Borrowing from Yourself 172 This same scenario is true if you're still employed and find you can't afford to pay off the loan. You end up defaulting on the loan. If you had borrowed from your local bank and defaulted on an auto loan and the auto was the collateral, the bank would send someone out to retrieve the car. Usually this person will be big and unfriendly, so you smilingly hand over the keys. Or if you don't, someone will come back in the still of the night and tow the car. So how is the plan going to try to get the money back you defaulted on? Are they going to come and knock on your door to retrieve the money from you? It's already spent. They won't come after you in the still of night and tow you away. They'll do you one better. They'll report you to the IRS. That's right, the ultimate weapon. They'll send you a 1099R and copy the IRS stating that you've taken a distribution from your retirement plan, and income taxes (as well as a penalty if you're under 59½) will be due for that year. What Is the True Cost of Taking That Loan? To answer that question, check the numbers in the figure on the following page. As you can see, Sue--who never touched her 401(k) account--is in the best shape. Poor Joe. He's out over $59,000 when we compare him with Sue's pot at the end of her rainbow, and there's a $53,000 difference when his pot is compared with what's in Pat's. Why? Because over that five-year period that he had his loan, he didn't make contributions to the plan. So you can see what taking a loan can do to you when you get to the end of the rainbow. When you borrow from your account, there is an opportunity cost associated with the loan. As stated early on in this chapter, "You're paying yourself back," right? But (here's that little word again) the dollars you're initially contributing to the 401(k) are going into the plan pre-tax. Now you take those dollars out in the form of a loan, but the dollars you're using to pay back the loan are