Borrowing from retirement plan is possible. However, this is something that you may want to consider not doing as there are several drawbacks to it. First of all, the main reason why you have your retirement savings is for you to live a comfortable life once you retire. You should work on your finances so that you’ll have something to use in case of emergency and you wouldn’t rely on making an early withdrawal from your retirement plan. If you still don’t see why you shouldn’t borrow from your retirement plan, here are some of the disadvantages that you may face if you do this.
You Wouldn’t Make the Most of the Compound Interest
Your retirement plan has compound interest. This means that you don’t only grow your investment on the interest of the principal amount, but with the past interests that also have their interest. If you borrow money from your retirement savings, the principal amount would decrease, which means the interest you earn, both from it and the compounding interest you earn from the interest would also go down. Your potential earnings wouldn’t be as high like when you have the entire amount in your account.
You Might Pay for Penalty for the Early Withdrawal
There’s typically a penalty that you need to pay if you withdraw early from your account. It’s usually 10% of the borrowed amount. No matter how much you borrow, the 10% penalty fee is still a lost on your savings. The payment term is also within a specific period, like five years. If you don’t pay the entire amount on time, your contributions may be taxed, instead of being tax-deferred.
Automatic Withdrawal Could Be Made
The lender or your retirement plan provider could make an automatic withdrawal from your paycheck. This has a benefit and disadvantage. The good thing about it is that you wouldn’t miss out on your payment so you could pay the loan on time. However, the downside is that this may affect your budget, especially when money is already tight.
Contributions May Not Be Accepted Until Loan is Fully Paid
The total amount that you would be able to save upon retirement may be affected as you may not be allowed to make any contributions until you paid the amount you borrowed in full. Because of this, you may not have enough savings on your retirement plan to cover your needs from your planned retirement age. You may be forced to extend on paying until you have enough funds or you would have to do to whatever’s left or saved when you retire.
You May Be Charged with Fees and Interest
Aside from the early withdrawal penalty, you may also be charged a certain amount for the processing of the withdrawal from your retirement plan. Aside from that, the amount that you withdrew may also be taxed. If you add all of these amount, this could already be significant, especially if the amount you withdrew is big.
Avoid early withdrawal from your retirement plan by working on your finances properly and stashing some cash for emergency situations so you don’t have to tap on your retirement savings.
Featured and 1st image courtesy of Stuart Miles/freedigitalphotos.net
2nd image courtesy of Stuart Miles/freedigitalphotos.net