Loan On Retirement : Retirement JeopardyWhen you need money there are always many places willing to loan it to you. There are commercial lenders, credit unions, banks, or Tony on the corner. Yet, you may be the best candidate as a lender for you own loan. Check with your retirement plan and see if your plan allows you to take a loan on retirement funds. If it does it may be the least expensive place to borrow money in town. The loan fees are usually less and if you have not had a good credit history it will be easier to borrow from yourself, Depending on how much you have in your account, your loan on retirement funds can be quite sizable. Generally the limit is, whichever is less of, $50,000.00 or 50% of your vested account in the plan. Most plan loans are secured by your vested plan balance so no additional collateral is required. Creating a loan on retirement funds has two major danger areas. The first, and most subtle, is that your retirement account may not be growing at the rate you expected when you established it. The interest you are paying on your loan may quite well be less than you would have made from other income sources. When actual retirement comes around you could find yourself short. By far the biggest danger area in a loan on retirement funds is if you default on the loan. Unlike a bank loan a default on a loan on retirement is considered a "deemed distribution." This means that the government is going to look at the defaulted loan as income in the year of the default. You could well have borrowed the money three years ago and have spent it already. Yet the income tax comes due with the default. Now for the double jeopardy. If you are under 59 1/2 you will be subject to the 10% early distribution penalty. Couple that with your state and local taxes and you could owe as much as 50% of your loan to the government. A person should always give a lot of thought before taking out a loan. Since a loan on retirement funds can have dramatic impacts on your future ability to live comfortably even more thought should be given to them. Think, plan, and think again. This is your retirement and your golden years that you are putting at risk when you borrow money against it. |