Should You Borrow From Your Retirement Plan?

Thursday, March 1, 2001

u t u F  u o V l o F g n i n n a Pl Should You Boow Fom You Retiement Plan? (NAPSA)—Let’s say you need money fo a big expense. Maybe you need a new ca, a house, o some hoe emodeling. Should you boowfom you etiement plan? O should you avoid that option-— so as not to isk you etiement? Boowing fom you etiement account may appea to have seveal benefits, especially if you ae still many yeas away fom etiement. The money is yous anyway, the inteest ates ae competitive and you make the payhack to youself. Thee can, howeve, be a seious downside to tapping you etie- ment account fo money. A Compound Issue Boowing fom you etiement savings plan can shot-change you etiement. Accoding to etiement expets at Divesified Investment Advisos, fist you lose the taxdefeed compounding powe of the money you boow. That's because, when you take money out of you account as a loan, thee’s that much less money on which to ean tax-defeed etuns. As a esult, you benefit less fom compounding, which means eaning money on you einvested eanings as well as you oiginal investment. Ove time, compounding can have a substantial impact on the gowth of you investment. Taxes and Paybacks You also get stuck paying taxes twice if you take out a loan. Fist, you pay back the loan with aftetax dollas. Then, you pay taxes again when you take the money out at etiement. You could face even moe taxes and penalties if you have to pay you loan back ealy. If you leave you job while you loan is outstanding, you loan pobably will become due immediately. If you cannot pay it back ight away, it Financial expets advise you to think twice befoe you boow money fom you etiement plan. will be teated as a taxable disti- bution, subject te income taxes. Tt may also be consideed an ealy withdawal, with a ten pecent penalty fom the IRS. Finally, many people who boowfom thei etiement savings plan contibute less to the plan because they ae also making epayments—with inteest. As a esult, you may end up with less than you expected when you'e eady to etie. If you decide to boow fomyouplan, ty to continue to contibute at the same ate, and make the epayments in addition to you contibution. Looking Hisewhee You may want to lookelsewhee if you need money, athe than boowing against you etiement savings plan. Fo exaople, if you'e ca shopping, see if you'e eligible fo a low-cost loan offeed by the automake. If you own a home, you mayhe able to get a home equity loan to cove unexpected expenses. These o othe options may be bette than jeopadizing you long-tem etiement secuity.

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