It stands to reason that you
won’t have the nest egg you’re hoping for if you
take money out of your retirement plan account before you retire.
But, in a family emergency or financial crisis, you may have
no other choice than to borrow money from your 401(k) plan
or—if a loan isn’t possible—take a hardship
withdrawal. Here’s what you need to know about your options.
It’s Your Money But . . .
If your plan allows, borrowing from your account
may be simpler and faster than taking out a loan from your bank
or financial institution. There might not be a credit check,
and you’ll probably receive the money quickly. And it may
seem like a good idea because you’re paying the money—with “interest”—back
to yourself. Your loan payment will be automatically deducted
from your paycheck and deposited in your retirement plan account.
But, before you sign the paperwork, think of the
downsides. The money you borrow can’t continue to benefit
from tax-deferred growth in your account. The money you use to
repay the loan will be taxed twice—once when you earn it
and again when you receive distributions from your plan at retirement.
And, because money will be taken out of your paycheck to repay
the loan, you may find you have to reduce, or even stop, your
regular plan contributions. Finally, if you leave your employer
for any reason, you’ll probably have to repay the loan
immediately or pay taxes on the unpaid balance.
In a Crisis . . .
If you’re really in a bind and you’ve
already borrowed the maximum amount allowed by your plan, you
may be able to take a hardship withdrawal. Generally, a hardship
withdrawal should be requested only as a last resort. Hardship
withdrawals typically can be used for medical expenses, the down
payment on a home, college tuition, or funeral expenses for a
family member. You’ll have to pay taxes and possibly a
penalty on the amount you withdraw.
Before you decide, you should
consult your professional advisor. And be sure to consider other
options—such as purchasing cash value life insurance
as a secondary emergency fund.
Protecting your personal and financial security
is important to us. There are many financial tools that can be
used to help you meet your retirement needs. Our Security
Mutual Life Representatives, working in conjunction with
your other professional advisors, can be be instrumental
in helping you plan for the best financial future for your family.
Please contact us if you have any
questions or are in need of planning assistance. (Legal
Notice)
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our Planning Library
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