It is scary that I have recently seen as few as 3 out of 10 people are saving for retirement. Let’s face it Social Security is not going away any time soon but the chances are that it will look and act in the same manner it does today when someone retires in 20 plus years is remote at best. Do I think I will have social Security when I retire in about 25 years? Yes I do, but it will be a different animal than what my parents are getting now. Let’s now say you are one of the few Americans who do actually save for your retirement. Money is tight and you ask yourself, “Should I borrow against my retirement accounts?” That is what we will look at in this blog posting.
Can you borrow against a retirement account? The answer to that is generally yes, but the answer is should you? Not only do you diminish your earnings potential on your account you open yourself up to possible tax consequences and penalties. Take a 401(k) loan as an example. Say you borrow $25,000 from the account and you decide to utilize the maximum of five years to pay it back. Provided you stay with your current job there are no issues as you will be making the payments back into your account. Now say you leave your job for whatever reason and you still owe $15,000 left on the loan. Here is where you can get into trouble with such a loan. You will have 60 days in which to repay the full $15,000 back to the account, unless you are over are 59 ½, or you will owe ordinary income taxes on that amount and you will owe a 10% early withdrawal penalty. Not a good position to be in if you ask me. Now this position is better than making an outright early withdrawal where the plan’s administrator will withhold generally 25% in taxes in addition to the 10% early withdrawal penalty.
The rules are basically the same for a Traditional IRA as a 401(k) plan in terms of what you can expect from an early withdrawals. ROTH IRA’s are a little different as they are funded with after-tax dollars. Provided you meet the time requirements on converted accounts you may take out the principal that was put into the account without any penalties after five years. For new ROTH accounts you are free to access the principal at any time without tax consequences or penalties.
For both types of IRA’s there are specific circumstances that allow for withdrawals but I never advise taking from a retirement account if it can be helped. Just because the law allows for you to withdrawal the funds does not mean you should by any means. Look elsewhere first and use retirement accounts as a truly last resort. Remember money that is tax deferred will grow much faster than money that is taxed. And if you are younger it has an even more dramatic effect on your accounts.
The short answer is yes you can borrow or withdrawal money from a retirement account but I advise against it. Look elsewhere for the funds if at all possible and leave your retirement alone and let it compound and work for you. While I think Social Security will be there in some form it most likely will not be sufficient to provide for all your needs and you will need all you can get in your retirement accounts.
