Pros and Cons of a Retirement Plan Loan

Analyze Whether or Not to Use a 401k Plan for Extra Money Now

Sep 11, 2006 Christopher Eger

Taking a retirement plan loan has got its own benefits and pitfalls, which are explored in this article.

As people seek different avenues of generating hard cash in financial hard times, a retirement plan loan is a deal that can answer many problems. To secure this loan, an employee borrows against his or her employee’s 401(k) account, and is normally used to immediate financial obligations.

Retirement Plan Loan: Need Explored

Like all financial agreements, a retirement plan loan comes with its own particular set of pros and cons. For this reason, the advice of a seasoned financial planner should be secured before embarking on such a loan. However, a few benefits and costs for a retirement loan have been listed here to provide a general understanding to readers, so anyone is able to plan his/her loan, with knowledgeable prudence.

Benefits of Taking a Retirement Plan Loan: An Easy and Quick Approach

For starters, a retirement loan is easier and simple to obtain, without involving the usual hassle of banks and financial companies. It involves lesser risks of being turned down, increasing the probability of securing a loan.

The payback on a retirement loan is comparatively easier and typically involves direct payments or automatic withdrawals from future contributions to a 401(k), pay checks or a checking account. Additionally, the interest rate that one pays for the loan goes into a person’s own account rather than to a financial company’s vault. So, in case of a loan to pay off high-interest debts with large credit balances, a retirement plan loan might be advisable.

In case a loan is acquired on a retirement account and the contributions continue, then the percentage of no-loan balance remains almost unaffected. Similarly, a quick repayment on a small loan would also minimize any long term impact on an account’s actual savings.

Negative Costs of a Retirement Plan Loan: Exploring the High Payback End

Though easier to acquire, the interest rate in case of a retirement plan loan might cost one more than a home or car loan. Therefore, one should carefully evaluate or consult with a financial planner before applying for a retirement loan.

A job layoff before the full repayment of the loan can lead to a financial catastrophe, since all payments previously made are rendered as taxable distribution. This can lead the borrower to pay more than they actually settled for. Also, there might rise a possibility of a tax penalty.

The amount taken out of the account in the form of a loan reduces the build up of tax-deferred assets on earnings, reducing funds in the retirement plan. The future earnings from the account would also diminish due to the depletion of assets.

The copyright of the article Pros and Cons of a Retirement Plan Loan in Mortgages/Loans is owned by Christopher Eger. Permission to republish Pros and Cons of a Retirement Plan Loan in print or online must be granted by the author in writing.

Toshiaki Mukai and Tsuyoshi Noda