Should I Borrow Money from My Retirement Plan?

By Kevin Jackson on February 20, 2019

“It’s not how much money you make, but how much money you keep and how hard it works for you. ~Robert Kiyosaki

You may already know that you should not dip into your retirement plan to fund frivolous purchases, however, there are a few instances where a loan makes sense and you should know the pros and cons.

By Kevin L. Jackson, CFP®

Unless borrowing funds from your 401(k) plan is intended to address a short-term situation and will be repaid quickly, consider pursuing other options. Not every 401(k) plan has a loan provision. Although those that do have varying guidelines, most allow borrowing an amount equal to half the vested account balance, up to a limit of $50,000.

Pros

• You do not need to complete a loan application.
• Your credit score is not a factor.
• Loans are not subject to tax or penalties unless there is a default.
• Your interest payments accumulate in your own 401(k) account.
• Your interest rate may be lower than with alternative sources of funds.
• Generally, you can repay your loan via automatic payroll deductions.
• Ordinarily, you have up to five years to repay the loan unless you leave your current employer.

• First time home buyers can withdraw, not borrow up to $10,000 without the 10% early withdrawal penalty if you are under fifty-nine and a half years old.

Cons

• You are paying interest on the loan with after-tax money, which defeats the tax-deferred benefit of a 401(k) account.

• Since the money you borrow will not be invested in the markets, you forfeit any potential returns

• In the event you leave your current employer, you typically must repay the loan within 60 days of your departure. Failure to do so will result in tax liabilities, as well as other penalties if you are under age fifty-nine and a half (10% early withdrawal penalty).

Kevin L. Jackson, CFP® is a Senior Relationship Manager at LRG Wealth Advisors. With more than a decade of experience in financial services, Kevin focuses on the development and implementation of wealth management strategies for high-net-worth individuals, families and small businesses.  To understand his clients’ needs, Kevin spends significant time discussing what is truly important to them. Those discussions guide clients through setting definitive goals and evaluating how aligned their decisions and actions are with achieving their objectives.