Account Loans: Handle with care
Some retirement plans let employees borrow from their account to pay for certain expenses, such as buying a home or paying for college.* But be careful – these loans come with strings attached.
Missed opportunities
If a loan is taken, individuals must pay it back -- including both the principal and some interest. Paying this "new bill" can make it harder to save in other ways. And during the loan repayment period, the monies borrowed will not be subject to growth.
Many plans give you five years to repay a loan. But if individuals leave their job, the loan may be due immediately. If they don't have the cash to repay what's owed, the outstanding balance may be taxed as ordinary income in the year distributed. For 403(b) and 401(k) plans, an additional 10% federal penalty tax may apply to taxable distributions made prior to age 59½.
The bottom line: Look at all of the options, including home equity loans or lines of credit, before taking a loan from the retirement savings account. Find out how taking a loan from the retirement savings plan may potentially impact your future financial security.
* The amount you may borrow is limited by rules under the Internal Revenue Code and your employer's plan. Please note: these loan limits apply on a combined basis to the highest loan balance in the past year under all retirement plan accounts with the same employer.