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Can I borrow money from my Retirement Account?

Marcus L. from Rhode Island asks, "Can I borrow money from my Retirement Account?"

Pension Evaluators & QDROS Of Troyan, Inc Associates Group answers, "An option some plans provide is a participant loan provision. This provision allows participants to borrow against their account balances. Some plans only allow loans for specific reasons (typically the same reasons that apply to hardship withdrawals), although some plans place no specific restrictions on what the need or use will be. You must consult your plan document for specifics.

Once you borrow against your account, you will be required to make payments back to your account through payroll deduction. You must repay the loan within a five year period (although this can be extended for a home purchase). Although the money for the loan has been withdrawn from your account, it is still counted as part of your plan assets, as a sort of liability. However, if you were to terminate employment, your distribution would be decreased by the amount of an outstanding loan. (See our discussion on Loan Defaults below.)

Advantages. While plan loans, like other distributions prior to retirement, should be minimized, there are several advantages in applying for a plan loan versus a traditional bank loan. A plan loan is convenient. There is no credit check or long credit application form. Some plans only require you to make a phone call, while others require a short loan form. (Plans may also require a spousal consent.) The interest rate is relatively low and set by the plan, typically one percentage point above the prime rate. (The current prime rate can be found in the business section of your local newspaper or the Wall Street Journal.) And the interest you do pay is paid to your retirement account, not to the bank or Credit Card Company.

Disadvantages. There are also some serious drawbacks to receiving a participant loan, and these should be given much consideration. Since the interest rate paid on a plan loan is often less than the rate the plan funds would have otherwise earned, you miss out the added growth to your account. Often, because you now have a loan payment, you may reduce the amount you are contributing to the plan and further reduce your long-term retirement account balance. Interest paid on the loan is not tax deductible, even if you borrow to purchase your primary residence, and you have no flexibility in changing the payment terms of your loan. There are also one-time set up fees and annual maintenance fees required to administer your loan. Also, you are "double taxed" on your loan amount; you are taxed on the amount of your loan when you eventually withdraw the funds (at retirement or termination of employment) and, since your loan repayments are made on an after-tax basis, you are taxed as you repay the loan balance. Finally, you should consider the possibility of defaulting on your loan, which causes serious financial consequences. If an employee quits or is terminated, the loan must be repaid in full, normally within sixty days. Should the plan participant fail to meet the deadline, a default would be declared and penalties and taxes assessed.

It is generally accepted that you probably shouldn't take a plan loan if situations where you are planning to leave your job within the next couple of years; there is a chance you will lose your job due to a company restructuring; you are nearing retirement; you can obtain the funds from other sources; you can't continue to make regular contributions to your plan and pay your loan; you can't pay off the loan right away if you are laid off or change jobs; you need the loan to meet everyday living expenses; or if you want the money to purchase some luxury item or pay for a vacation.

Credit Reporting Loans from your retirement plan, even in the case of a loan default, are not reported to credit-reporting agencies, and will not negatively impact your credit rating. But if you are applying for a mortgage, lenders will ask you if you have such loans and they will count the loan as debt.

Plans are not required to let former employee take plan loans and few allow them to do so."

Pension Evaluators & QDROS Of Troyan, Inc Associates Group QDRO Consulting offers expert QDRO outsourcing services to divorce attorneys and mediators, as well as retirement plan administrators.
Divorce attorneys/mediators – You can rely on Pension Evaluators & QDROS Of Troyan, Inc Associates Group to draft QDRO documents correctly and promptly for your clients, and obtain pre-approval by the plan administrator. We will be pleased to work with you and your law office, or directly with your clients (after the divorce is finalized by your offices) in the QDRO process.

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Just click here to begin the process to begin the application process forms on this site (or direct your client to do so), along with prepayment of our fee, either by check or credit card (online). For more information, call to speak with our QDRO experts at 800-221-0706 and reference the state for your Divorce matter for discussions.

DISCLAIMER: Any legal information on this blog has been prepared by Troyan from informational purposes only and should not be construed as legal advice. The material posted on this website is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Note that sending an e-mail to Troyan does not create an attorney-client relationship, and none will be formed unless there is an agreement between the firm and the individual.
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The information on this website is for general information purposes only. Nothing on this site should be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or viewing does not constitute, an attorney-client relationship.
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