The Problems of Borrowing from Your Retirement Plan


When it comes to your finances, debt is one of the things that can prevent you from meeting your monthly and annual financial goals. For any person, debt is our financial obligation that we pay at a given period of time. The one thing you need to comprehend is that debt can delay your retirement altogether.

If you are struggling to pay the bills, it can be clear that you cannot meet your financial obligations such as long-term savings or retirement. With the 2016-year starting off, try and make a plan on how you can pay off your debt in the most efficient and effective way. Try not and make the mistake of taking out of your retirement plan. The purpose of a retirement plan is to finance your post-work years, allowing you to maintain a financial holding for your personal standard way of living. Any type of withdrawals permitted under the plan can compromise the amount and your future.


As such, any financial or retirement advisor will encourage you to both save and defer from making any withdrawals. The reason is because there are negative repercussions when you do. Taking a loan from your retirement account may adversely affect your retirement savings. The only time you do this is if you have exhausted your other financial options. For instance, if you have a credit card balance of $10,000.00 dollars with an interest rate of 20% and you can only afford $200.00 dollars per month, it might make financial sense to take a loan from your retirement to pay of that exceeding balance.

When it comes to taking a loan or making a withdrawal, it is imperative that you understand the difference between the two. When withdrawing from your account, you are removing a portion of your balance and reducing the numbered amount from your assets in your portfolio. In comparison, with a loan, the loan itself is treated as part of your portfolio. Unlike a withdrawal where you are not required to return the amount, with a loan you will be asked to repay the amount in order to avoid tax consequences. One of the biggest reasons against taking a loan from your retirement plan is that the amount you repay in interest will be double taxed. This is because the loan repayment includes the interest. Now, because of that tax, some people will decide to withdraw than loan. While it is understandable, just note that at the end of the day, you are risking your financial future. Remember, the goal for your retirement plan is to provide an estimated source of income after your post-work years. This cannot be beneficial if you pull the assets from this savings.


At the bottom line, you should not take a loan from your retirement account unless it is an absolute necessity. View your finances holistically and determine whether the loan is beneficial for you right now. Yes, having a large debt is not the most comforting thing in the world, but you do not want to make the mistake in risking your future.