Financial Counseling Certification Program (FiCEP) Practice Exam

What should members generally avoid doing with their 401(k) or 403(b) accounts?

1. Investing all funds in high-risk options

2. Taking out a loan against them

3. Making frequent withdrawals

4. Contributing less than the maximum limit

The correct answer is: Taking out a loan against them

Taking out a loan against a 401(k) or 403(b) account is generally advised against for several reasons. When members borrow against their retirement accounts, they are potentially compromising their long-term financial security. First, the funds taken out as a loan are no longer invested, which can hinder the growth of the retirement account over time due to lost compounding returns. Since these accounts are designed for long-term investment, any withdrawal can affect the overall value significantly, especially if the withdrawal occurs during a market downturn. Additionally, if a member leaves their job or is terminated while having a loan outstanding, they typically must pay back the full amount by a certain deadline. Failure to do so can result in the loan being treated as a taxable distribution, which may involve penalties if the individual is under retirement age. Furthermore, taking a loan can foster a reliance on such borrowing practices, which runs counter to disciplined financial planning. It may suggest a need for immediate funds without considering long-term impacts, leading to potential challenges in maintaining adequate retirement savings down the line. This understanding drives home the importance of considering the implications of such actions and prioritizing retirement savings accordingly.