Borrowing From Your Retirement Should Be Done At Own Risk
We often talk about the economy and its current phase of inflated prices, a decreasing US dollar value, and oil prices that have Americans rethinking distances they travel but the world still turns meaning one way or another, individuals are forced to make ends meet. So how then are hundreds of thousands of people coming up with money they simply do not have? For some the idea of borrowing the money from themselves makes sense.
Enter the hardship withdrawal, a loan whereby a consumer takes a chunk of change out of their 401(k) or similar retirement plan. The idea of course being that perhaps the money would be of more use now than it would later as mortgages need to be paid, credit card bills continue to pile, groceries are getting more expensive by the minute and we don’t need to get into what oil’s been doing.
These withdrawals aren’t simply free money, however, and follow the rules of any other loan. This money is taxed as income as far as the government’s concerned and distribution penalties (as high as 10%) can be tacked on if the borrower is under 59 and ½ years of age.
That’s not all though, others chose to take out a single loan against their retirement, which could worth up to $50,000 (or 50% of the total amount invested in the account, whichever works out to be less). Here’s the catch with this one, if the borrower happens to default on the loan it is instantly considered a withdrawal and the taxes and penalties we talked about above come calling.
In the end, these loans can result in a retirement that is tens of thousands of dollars shy of where it would be had the account remained untouched. What’s worse is that according to experts, the retirement savings amounts here in the US are already dangerously low even without taking money out to solve short-term finances. Estimates have been calculated as high as nearly 50% of middle-aged Americans risk being unable to maintain the standard of living in retirement as in their working years as it is.
Keep in mind that many employers match contributions to your 401(k) account meaning that withdrawing money is actually costing the borrower twice in this situation. Once you account for the fact that the money is taxed as income, the benefits of borrowing from one’s self begin to lose their appeal.
