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Your retirement plan provides a great opportunity to boost your
financial health. But did you know your plan may also let you borrow from
your account? If you need a loan, what better way to get one than to
borrow from yourself and pay yourself back - with interest? Sound good?
First make sure your plan allows loans, then review the pros and cons
carefully before you borrow.
Plan Loans Seem Like a Good
Idea
In addition to the best lender ever (you),
retirement plan loans may offer the
following:
- competitive interest rates
- no review of your credit history
- easy repayment through payroll deductions
- possible repayment periods of up to 5, 15, or even
30 years, depending on the reason for the loan
Are You Willing to Risk
Retirement?
Plan loans can also have pitfalls. If you leave
your job, you may have to pay back the entire
loan balance - in full, at once - or deal with the
IRS.* Say you owed $10,000 and quit your job.
Either you repay the $10,000 to your account or
pay $2,500 (ouch!) to the IRS for income tax.
Borrowing from your retirement
plan may affect your long-term success
Also, to finance the loan, units or shares must be
sold from your account. Depending on what's
happening in the markets, you could be "selling
low" -which is one of the biggest mistakes you
can make while investing - and losing out on
potential gains. Finally, a loan especially a big
one - may affect your long-term savings
success. Although you pay yourself back with
interest, the rate you pay may be lower than the
returns you might have earned on the money
you borrowed if it had stayed in your account.
The bottom line? Be your own financial adviser.
Ask yourself if you really need to use your
long-term retirement money for more short-term
needs. You don't want to reach retirement and
wish you hadn't taken a loan. Think carefully
before borrowing from yourself.
* Plan provisions vary Some plans may allow for the
repayment of loans after termination
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