Is it Ever a Good Idea to Borrow From Retirement Savings?

dont pay full price for anythingLife is expensive, and few people can manage to cover healthcare, college savings, retirement savings, a mortgage, the daily costs of living, and accumulate a large emergency fund. So if you’re laid off, face a family medical emergency, or are drowning in debt, borrowing from your retirement savings can feel like a tempting option. After all, if you’ve done things the way you should, your retirement account is likely your largest.

Every expert will tell you never to borrow from retirement savings, but is this advice really sound? There are exceptions to every rule, and sometimes the need to remain afloat today should outweigh any concerns about the future. Here’s how to make the decision.

Loan or Withdrawal?

Are you considering a loan—which you’ll pay back—or a withdrawal, with no intention or plan to pay it back? The former may be justifiable. But a withdrawal with no plan for a repayment is essentially a way to steal money from your own future. You must exhaust every other option before doing it. A loan, however, could be a wise decision if you temporarily need the funds, have a clear plan for repayment, or have a reliable belief that you’ll soon have a way to repay the funds.

How Much Will the Loan Really Cost?

Before making the decision, you need to compare the cost of a retirement savings loan to a credit card or other loan. Don’t just weigh the interest your retirement is earning against interest on a loan. Consider also that you’ll be doubly taxed on most retirement withdrawals. Factor in the total cost, accounting for how long it will be before you can repay yourself and recoup the loss. Then select the cheaper option. It only makes sense to borrow from retirement when the total costs of double taxation and lost compound interest are less than the interest you’d pay on a personal loan.

Is the Need Really Urgent?

When you have a giant pot of cash just sitting around earning interest, suddenly non-urgent needs can look like emergencies. A lifesaving surgery is an emergency; getting a brand new car or taking a vacation can wait. So too can starting a business. So before you loan yourself money from your retirement account, be honest with yourself. Is this really an emergency, or just something you really, really want to do? It’s only appropriate to borrow from retirement when your well-being (or your family’s) depends on it. 

Alternatives to Retirement Savings Borrowing

A loan from your retirement is a choice of last resort, not an easy way to access cash. Exhaust all other options before trying this route. If you’re over the age of 62 and nearing retirement, a better option might be a reverse mortgage. This loan taps into your home’s equity to give you access to money you can spend as you see fit. As long as you remain in your home and meet the requirements of the loan, you will not have to repay it. This makes a reverse mortgage an excellent option for struggling seniors, and you might even be able to use some of the loan to invest more in your retirement accounts.

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