Should you take a loan from your retirement plan?
When you are confronted by a financial emergency, you may immediately think of taking a loan from your retirement plan account to tide you over. It’s tempting— after all, it’s your money. However, borrowing from your retirement plan has as many disadvantages as advantages. Here’s what you need to know.
Advantages
- The interest you repay on your loan is paid back into your account.
- You won’t owe income taxes or have to pay a penalty because you are borrowing rather than withdrawing money. However, this is only true if you do not default on the loan. A loan default will make the outstanding loan amount taxable.
Disadvantages
- The money you withdraw will lose the potential for future growth while it is not invested.
- You have to make repayments with after-tax dollars that will typically be taxed again when you eventually withdraw them from your account.
- You can never deduct the interest on the loan even if you use the money to buy a home.
The reality is that it may be smarter to keep your retirement money invested in your plan account and look elsewhere for funds to meet your immediate needs.
Your retirement plan provides stability when everything else is changing.
Our lives have been changing at a dizzying pace through much of the last two decades. Artificial intelligence, quantum computing, remote work, and other new technologies are upending how we work, socialize, and live. In a period of such change, it’s reasonable to ask what life will be like in the next decades. Can we earn a living, and can we depend on Social Security to be there when we’re ready to retire?
We can speculate, but there’s no way we can answer these questions. However, we do know that what we do now can impact our future lives. And when we save through an employer-provided retirement plan, we are helping to lay the groundwork for a financially stable future.
It’s up to you
Few workers have access to old style pension plans, and the Social Security system may undergo some changes to its present form in the future. But you can depend on your own personal savings and the money that you accumulate in your retirement savings plan.
It’s smart to put money aside during your working years for the years ahead. If you don’t participate in your retirement plan, start now. If you are in the plan, think about boosting the amount you contribute. Your retirement plan account can be an anchor in changing times.
The time to act is now
With longer life spans becoming more common, you could be retired for several decades. Whether you have 20, 30, or more years until retirement or it’s just around the corner, your retirement savings plan can help you prepare for your future.
Life expectancy for a male and female born on January 1, 2000
55.6 Years
Male additional life expectancy at current age.
59.8 Years
Female additional life expectancy at current age.
20.1 Years
Male additional life expectancy at age 67 (Full retirement age).
22.2 Years
Female additional life expectancy at age 67 (Full retirement age).