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Borrowing From Your Account

When unexpected financial needs arise, it may be tempting to take a loan from your workplace retirement plan account. It may be easier to get than most types of loans, the interest rates are competitive, and because you’re essentially borrowing from yourself, you get to pay yourself back—with interest.

Borrower Beware

But before you decide to tap into your retirement savings, consider these serious drawbacks:

  • The money you borrow is no longer invested, so you could miss out on the potential tax-deferred growth of the loan amount.
  • You may not be able to afford contributions to your account while paying back the loan. You may also miss out on matching contributions, if available in your plan.
  • If you stop your loan payments—or if you leave (or lose) your job and can’t repay your balance—you may have to pay substantial taxes. That could include both federal income tax and a 10% early withdrawal penalty, plus state and local taxes if applicable.
  • Your interest payments are not tax-deductible.
  • Your loan payments are taxed twice, first when you make them with after-tax income and again when you withdraw the money in retirement.


About Plan Loans

  • Most workplace retirement plans offer loans.
  • Your plan may allow loans for any reason; only for specified purposes (such as, purchase of a home or educational expenses); or only for financial hardship (such as, medical expenses or eviction).
  • Most plans allow loans of 50% of your vested balance, but no more than $50,000.
  • The typical repayment period is five years.
  • Interest rates are usually 1 or 2% above prime.


Explore the Alternatives

Your retirement plan is designed for long-term investing, so it makes sense to think of your plan as off-limits until retirement. Establish a separate emergency account to help protect against unexpected short-term financial problems. Don’t touch that money until you really need it.

If you face a real emergency and have exhausted all other options, a loan from your plan may be your last resort, in that case, try to pay off the loan as quickly as possible. Keep up with your regular contributions to minimize the negative impact on your account balance. Think very carefully before borrowing from yourself to pay for an immediate financial need. You may want to consult a financial professional for help with this important decision.

 

 

Many tax planning strategies emphasize the deferral of current income taxes, on the basis that your federal income tax rate may be lower at retirement. Please keep in mind that federal income tax rates are unpredictable and may be higher when you take a distribution than at the time of deferral. Other factors, including state tax rates and your income, may also affect your overall tax rate upon distribution. Please consult with your tax advisor for individual tax planning strategy and advice. The Hartford does not predict or in any way guarantee favorable tax results.

This information is written in connection with the promotion or marketing of the matter(s) addressed in this material. This information cannot be used or relied upon for the purpose of avoiding IRS penalties. These materials are not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, you should consult your own tax or legal counsel for advice.

NOT INSURED BY FDIC OR ANY FEDERAL GOVERNMENT AGENCY - MAY LOSE VALUE - NOT A DEPOSIT OF OR GUARANTEED BY ANY BANK OR ANY BANK AFFILIATE

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