Saving money in your retirement plan is a good idea, and a critical part of any long term financial plan. But there are many decades between you and retirement and sometimes, you are faced with a situation where you could use that money before you’re at retirement.
People do pull money from their retirement accounts. You can- it’s legal, even if it comes with a fine. The question then, is not IF you can do it, but SHOULD you borrow against 403b or 401k retirement plans?
What it Means to Borrow Against Retirement
Borrowing against your retirement means that you are taking money out of your retirement plan for a purpose, and that you plan to pay it back. This is a loan; you can also make a simple withdrawal from your retirement plans and NOT pay it back.
We’re just going to focus on loans today. If you have to borrow against 403b or 401k plans, I do think it’s a good idea that you pay it back. Give yourself the gift of a strong retirement savings.
Loans from retirement plans are not taxable events- this means that the money you borrow is not taxable, and it has no impact on your credit score. There’s no lender but there are rules to it. Generally you can borrow up to $50,000 or 50% of the assets in your plan, whichever is less. Loans against your own retirement are faster to get than traditional loans, and they don’t come with strict rules, though 403b loans must be paid back within 5 years.
Why You Might Want A Retirement Loan
You might consider borrowing against retirement if you have a short term and highly pressing financial need. Short term means generally a year or less. Financial need is a little more nebulous; it could be that you need help paying the rent or mortgage, or that you have a medical crisis. Maybe you want to start a business and need some capital.
It’s your money, and you have the right to borrow against 403b or 401k plans.
Why You Might Not Want to Borrow Against Retirement
It can get very expensive to borrow from your own retirement plans. Taking money out of your retirement accounts will hinder the interest you’re able to earn on the balance. If you don’t pay the loan back within the allocated time frame, you do have to pay tax on it.
You also have to pay a 10% early withdrawal fee if you are below 59 and 1/2 years old, and if you don’t pay back the loan on time.
You also will be double taxed. When you start making repayments, both the loan amounts (including the interest you pay) are taxed, and then when you withdraw this money in actual retirement, it’s taxed. Bam- double taxation.
It’s a personal decision to borrow against 403b or other retirement plans. Consider carefully the purpose of borrowing the money, and the financial implications of doing so.
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Kara Perez is the original founder of From Frugal To Free. She is a money expert, speaker and founder of Bravely Go, a feminist financial education company. Her work has been featured on NPR, Business Insider, Forbes, and Elite Daily.