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Borrow against retirement??

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Jazzzy
Valued Contributor

Re: Borrow against retirement??


@PaBill wrote:

@Jazzzy wrote:

@Becca wrote:
@I have 2 CC's and 2 student loans that I would really like to get paid off asap. One CC has a limit of 3,500.00 w/ a balance of @ 2,500.00. The other has a limit of 1,000.00 w/ a balance of 850.00. These are really hurting my score. The student loans total 1,500.00 combined.
My question...I can borrow against my retirement  for a low 4% interest, and pay all of these debts off. I know I could save money in interest payments. But I'm wondering if this is a good idea?  Has anyone out there done this? Or have any advice on this matter?
                                                                  Thanks in advance

Becca, when you borrow from your retirement account, you lose the ability to earn anything on that amount until it is paid back. The loan is costing you 4% interest...plus the loss on investment. That can be a very high price. I wouldn't do it for this low of an amount. Also, in my opinion it is a very bad habit to get into. I don't think most people realize what they cost themselves by doing this. If it is the only way...that's one thing. But, in your case it is not. Is it possible to cut back on other expenses to get your cards paid down? Tighten the budget? Earn a little more money? You'll be glad you left your money untouched.

 

Are your student loans federally insured loans? If they are, you have to think carefully about paying them off early. You are giving up a lot of federal protections like deferment. Also, heaven forbid, if you die or are disabled, these loans would be discharged. Have you checked into income based repayment? What is your interest rate on the school loans?

 

There are a lot of financial factors to consider. However, if just getting the debts gone is your highest priority, then a loan against retirement is doable. Just think long and hard about how you are going to keep this from happening next year, and the year after, etc. The point of retirement is putting money away that can grow. It can't grow if you keep taking it out.


Not actually true. While there might be a slight loss of interest by borrowing the money, the 4% interest that she is paying goes into her account, along with the money that she is paying back...


If there is only a "slight" loss of interest by borrowing the money, then the retirement fund is not allocated correctly. Properly invested retirement accounts are earning much more than "slight" interest.

 

Taking money out as a loan can mean a substantial loss, but many people don't see it because it is a loss of money they will never earn. They never earn it, so they don't see it as a loss, but it can be a big one. And as for the 4% interest she is paying herself...SHE is paying it. It goes from one pocket into the other. It is certainly not a gain.

Message 11 of 18
bobebob
Frequent Contributor

Re: Borrow against retirement??


@Becca wrote:
@I have 2 CC's and 2 student loans that I would really like to get paid off asap. One CC has a limit of 3,500.00 w/ a balance of @ 2,500.00. The other has a limit of 1,000.00 w/ a balance of 850.00. These are really hurting my score. The student loans total 1,500.00 combined.
My question...I can borrow against my retirement  for a low 4% interest, and pay all of these debts off. I know I could save money in interest payments. But I'm wondering if this is a good idea?  Has anyone out there done this? Or have any advice on this matter?
                                                                  Thanks in advance

There are pluses and minuses for doing this:

Good things:

1. Consolidates 4 different loans you had to track and make payments on.  Life gets easier.

 - if the student loans can be defered without interest accruing, you might wait and pay them off later since inflation would lower the true value of the loan.  But they are only $1,500 and I wouldtn't consider the small amount of savings you would see worth my time.

2. Interest payments go away.  This is especially good for the CC's.

3. The interest you pay on the new loan goes back into your retirement account.

4. Student loans are NOT dischargeable in bankruptcy.  They will hang around your neck until death.  Good to get rid of in my opinion.

5. Utilization on the CC's goes to 0.  This should give you a nice bump in your credit score.

 

Bad thing:

 -  If you are unable to pay back the loan, it is considered a non-qualified distribution.  This will mean it will be taxed as income and you'll pay an additional 10% penalty on top.  Things like losing your job or medical emergencies could cause this to happen.

 

Could be good or bad:

 -  As discussed by others, the money you take out in the loan is no longer invested in whatever fund you had it in.  Should the market take off like a house afire, you'll miss out on the party. (I don't see anyone getting out the gasoline yet, but I could be wrong)

However:

 

Making some guestimates on what your interest rates are:  say 18% on CC's and 4% on student loans.  Your overall interest would be about 13.5% on the debts you would be paying off. 

 

Adding the 4% interest you will be paying yourself back into your retirement account as you pay back the loan, I view that as a net 17.5% interest rate of return on the loan.

 

While the market may outpace this 17.5%, it is a sure thing and the market isn't.  If the market goes down and you left your money in there instead of doing the loan, you'd be losing out that way.

 

Things you can do to minimize the risks:

1. Make sure you job is relatively secure before doing the loan.  If you're hearing rumors of layoffs or you got a bad review, now is not the time to take a loan out against your retirement.

2. Select the term on the loan to pay it off as aggressively as you can afford.  This will minimize the amount of time your money isn't available to ride the up-market.

3.  Don't run up your CC balance again.  If you do, this will all be for nothing.  Pay in full every month.

 

If you feel that your job is relatively secure and you trust yourself not to abuse the CC's, I think that this is probably a reasonable action to take.

bobebob || Nov: My FICO SW EQ(Upgraded Version) = 822 ||Sept: Walmart TU Fico=838Goal = FICO's>800 || In my wallet: CostcoAmEx(20k), DCU Visa Platinum (10k), BoA Visa Signature (17.1k), Walmart Discover (7.5k), AmEx Corporate (5k). All PIF every month.
Message 12 of 18
Lcamcpacom
New Visitor

Re: Borrow against retirement??

It depends on the structure of the plan.  A 401(k) – like all qualified plans – may, but is not required to provide for loan. If a plan provides for loans, the plan may limit the amount that can be taken as a loan. The maximum amount that the plan can permit as a loan is (1) the greater of $10,000 or 50% of your vested account balance, or (2) $50,000, whichever is less. For example, if a participant has an account balance of $40,000, the maximum amount that he or she can borrow from the account is $20,000.

 

In addition, a plan that provides for loans must specify the procedures for applying for a loan and the repayment terms for the loan. Repayment of the loan must occur within 5 years, and payments must be made in substantially equal payments that include principal and interest and that are paid at least quarterly.  Loan repayments are not plan contributions.

 

A loan that is taken for the purpose of purchasing the employee’s principal residence may be able to be paid back over a period of more than 5 years. However, a plan may suspend loan repayments for employees performing military service.

 

Loans are not dependent upon hardship. Some plans may provide for hardship withdrawals, however. As long as a plan provides for loans, the purpose of the loan or the participant’s ability to borrow the same amount elsewhere is irrelevant in determining whether the loan is permitted, unlike hardship withdrawals, which require a demonstration of need.

Message 13 of 18
student-of-credit
Established Member

Re: Borrow against retirement??

Sorry in advance if this sounds harsh. In short I would not suggest you borrow against your retirement plan. >>>> The loan comes due immediately if you lose the job. >>>> If (heaven forbid) you must declare bankruptcy (due to sudden health or unemployment expenses), the money in your 401(k) is *off* the table, as far as your bankruptcy estate. This was determined at the national level by the Supreme Court, and does *not* vary by state. >>>> Giving yourself an "out" to saving establishes a bad habit. Besides the disadvantage of taking the loan itself, I disagree with your reasons for taking it. >>>> Reducing your balance on a credit card to have a higher "credit score" approaches the problem from the wrong direction. You only need a high credit score if you are trying to get more credit. I suggest you work on managing the credit you have, like paying the balance in full each month. When I got my first mortgage, I had three FICO scores above 800, and these were done *entirely* with credit cards, of which I *never* carried a balance. >>>> You may get more sympathy from me about retiring the student loan. But I wager the interest on the credit card probably is higher rate than the student loan, and so I would still focus on retiring the credit card debt. Again, sorry if this sounds harsh, but this approach has worked for me.
Message 14 of 18
BamCat
Established Member

Re: Borrow against retirement??

One issue that I didn't see mentioned is taxation.  You'll be borrowing money on which you've never paid income tax and paying it back with after-tax dollars.  Then when you withdraw it in retirement, you'll be paying income tax on it again.  This means that you will be paying double taxation.  This is just another point to consider when making your decision.

Message 15 of 18
wa3more
Established Contributor

Re: Borrow against retirement??

Listen to what Thom said.

 

Do borrow against youre retirement just to manage your credit score.

Message 16 of 18
StartingOver10
Moderator Emerita

Re: Borrow against retirement??


@wa3more wrote:

Listen to what Thom said.

 

Do borrow against youre retirement just to manage your credit score.


^^^Do NOT borrow against your retirement just to manage your credit score. There are some excellent ideas in this thread. Borrowing against your retirement is a bad idea for your stated purpose. Pay down your debt by adjusting your budget or getting a side job or selling off extra items you have around the house and applying the funds to your debt.

Message 17 of 18
wa3more
Established Contributor

Re: Borrow against retirement??

Thanks Starting.

 

 

I forgot the NOT. Meant do not borrow.

Message 18 of 18
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