The Pros and Cons of Borrowing From Your Retirement Plan

Many people that are going through financial difficulty consider borrowing money from their retirement plan. But the question is, is it okay to do that? Will it benefit you more than choosing another way to borrow money?

These questions will surely flood your thoughts if you come face-to-face with the situation. Hence, it’s important to check out the pros and cons of borrowing from your retirement plan first before you decide if you want to continue or not.

​The Pros of Borrowing from Your Retirement Plan

First, let us talk about the advantages you can get when you decide to push through and borrow money from your retirement plan. Then, we'll go through each of the benefits to give you a clear understanding of how it works. 

Easy Money
The first advantage you can get when you borrow money from your retirement plan is the quick and easy processing. Whatever reason you have, you're eligible to borrow money from your retirement plan. 

Additionally, you won't undergo a credit check, which can be a relief if you don't have a good credit score. The amount you're allowed to borrow will depend on the type of plan you have.

Overall, borrowing money from your retirement plan is a good option. However, if you don't want to touch the money for your retirement, you can opt for another option. For example, you can acquire both installment and bad credit loans in the Houston area, a personal loan in Miami, or a payday loan in Indianapolis.

Easy Repayment Method
The repayment of the money you borrowed from your plan will be automatically deducted from your payroll. This means that you'll never have to worry about any missed payments. 

Another great news for you if you choose to go this path is that you won't have to pay for interest to a third-party lender. The interest and the principal amount will go back to your retirement plan. Therefore, you'll still be the one who's going to benefit from your repayment.

There'll Be No Impact on Credit Record
Another great benefit of borrowing from your retirement account is that it won't affect your credit record. No hard credit checks will be conducted. Therefore, it won't show up on your credit history.

If you opt to borrow money from lenders or banks instead, expect them to perform a credit check that can reflect on your credit record. When the lender or the bank conducts a hard inquiry on your credit score, it'll stay on your credit record for two years.

The Cons of Borrowing from Your Retirement Plan

Now that you have an idea of what advantages you can get from choosing to borrow from your retirement plan, here are the downsides of this option.

Limited Amount to Borrow
One of the disadvantages you might notice if you choose to take this path is the limitation imposed on how much you can borrow. Usually, the amount allowed for you to borrow is around 50% of your retirement savings.

If you only still have a small contribution and require a considerable amount, you'll have to look for an alternative route. However, if you only need to borrow a small amount, you shouldn’t hesitate to borrow from your plan.

You Have to Pay Tax in Double
Another thing you have to take note of about borrowing money from your retirement plan is that you'll have to pay taxes twice.

First, you have to pay the income tax for the salary that you'll use to repay the money you borrowed from your retirement plan. Second, you'll have to pay tax when you start to collect your retirement money as distributions.

Needs to Pay the Loan Short Term
The principal amount that you borrowed plus its interest rate should be paid within five years only. If you quit your job or switch employers while you still have a loan to pay, you'll be required to pay the balance in full for a short window of time.

In addition, you'll be required to pay federal income taxes for the loan. Therefore, it'd be best to consider the 10% penalty for the early withdrawal that the IRS would charge.

You Won't Be Able to Save
The last concern you must consider is the amount of money you'll get when you retire. Borrowing money from your retirement plan will mean that you won't save money for your retirement.

The money deducted from your payroll will be as payment and not as a contribution. Therefore, when the time comes that you'll retire, you will only have a small contribution, which results in a small retirement pension.

Weigh the Pros and Cons

Before you jump into borrowing money from your retirement plan, it'd be best to weigh the mentioned pros and cons. Are you willing to take the risk? Do you badly need the money fast? If you think that the benefits outweigh the risks, then you should start processing that loan soon.