The BIGG Successs Show
I Need Money! Should I Borrow from my Retirement Plan?
How you pay by borrowing from your 401(k). You'll find a written summary of today's show, along with links to the article we refer to and the other two 401(k) shows we've done at BIGGSUCCESS.COM.
- Welcome to The Big Success Show. Today, we'll talk about how you pay by borrowing from your 401(k) - The Big Success Show with George and Mary Lynn. - Mary Lynn, when I hear you say that for some reason, I think of Dr. Seuss. - Oh, there's no green eggs in him here. - We've been talking about tough times and decisions that we make during those tough times, right? And one of those things that we've talked about is taking money out of your 401(k) and that's the worst thing you can do. It's something only as a last resort. - The other thing we've talked about is cutting back on your contributions. Now, that's okay as long as you can keep hitting that employer match because that's like found money. So, why would you give that up? - Right, and today we wanna talk about borrowing from your 401(k). Now, the best advice we can possibly give you is don't listen to us. (laughing) What we really mean by that. What we really mean by that is we're gonna give very general advice. Your specific situation is what really drives your decision and so talk to your financial planner or someone who's advice you really trust with your money. But probably a better solution in many cases than borrowing from your 401(k) would be to actually get a home equity line of credit or tap into your existing home equity line of credit. - Although there may be some challenges in getting that loan because of the lower house prices, the tighter credit. Now, those are a little bit harder to come by these days. - Absolutely right, Marylin, and that's the reason more people are considering borrowing from their 401(k). Now, it's not an unlimited pool of money, right? You can only borrow up to half of the vested portion of your portfolio, and there's actually even a $50,000 limit, and you can only take out two loans each year. - And the nice thing about borrowing from your 401(k) is that there's no approval process because it's your money and it's a relatively inexpensive source compared to the home equity line of credit. - Well, yeah, and the reason it's relatively inexpensive is because obviously you're borrowing from yourself, but in the eyes of the government, you and your 401(k) are two separate entities, so you do have to pay the loan back. - And there's two ways you can pay back your 401(k) loan from your paycheck, so your paycheck's gonna go down, or with quarterly installments, over five years in most cases. - Yeah, an example of that would be if you borrowed 10,000 from your 401(k), and you decided not to have the payments made through your paycheck, you would be required every year to pay back $2,000. So in other words, each quarter, you'd have to make at least a $500 payment plus interest. - And if you don't make that payment on time, you're gonna have to pay taxes on what you haven't paid, and if you're under 59 and a half, you'll be paying a 10% penalty as well. - And because the government looks at it the same as if you took money out, and you're gonna be earning a return that's probably lower than what your portfolio would earn, and the payments are made in after tax dollars. That's why it's so important to compare the rates with a home equity line of credit, 'cause those are made before tax, and so they may actually be less expensive. - And coming up, scenario analysis. - Today we're talking about whether or not it's a good idea to borrow from your 401(k), and we wanna look at some scenarios. - We found a great article from the Center for American Progress Action Fund, and they looked at a whole bunch of scenarios, all involving a $5,000 loan. - If you take out a loan, and you pay it back in full with interest, and you continue to make your regular contribution, here's the good news. There's almost no effect on your end retirement portfolio. In fact, it's less than 1% in all cases. - But they also found that there's a double whammy. If you borrow money from your 401(k) and quit contributing to your 401(k). - Which is kind of a natural thing, right? We're needing money, so we're gonna probably quit contributing along with borrowing. - That's right, but they found that as much as 22% of your expected savings at retirement could be gone, if you do take out a loan and stop contributing. - Let's do a little scenario analysis of our own. What happens if, let's say, my company cuts back, and I lose my job. Now, I almost have a need to pay this loan back immediately. Will I have the money? - Or what if you leave your job because you got a great offer from another company? - Yeah, look at the positive scenario, right? - But still, you gotta pay that loan back. - That's right, and so the thing is, borrowing may be an option. It's definitely better than closing out your account. But look first to cut back on your retirement contributions, but try not to go below that employer match, and before you do that, look for other ways to cut back. - You can find a written summary of today's show on our site at bigsuccess.com, that's big with 2G's. We also have a link to the article that we mentioned, and we have links to our other 401K shows that we've done. - Next time, we'll talk about merging your networking worlds. - Until then, here's to your big success. - The big success show at bigsuccess.com. [MUSIC PLAYING] [BLANK_AUDIO]