The purpose of retirement planning is to finance your post-work years, allowing you to maintain or improve upon your pre-retirement standard of living. As such, your 澳洲幸运5官方开奖结果体彩网:financial/澳洲幸运5官方开奖结果体彩网:retirement planner will encourage you to save as much as you can in your 澳洲幸运5官方开奖结果体彩网:qualified retirement account(s) and to defer making wi꧒thdrawals for as long as is permitted under the plan.

Taking funds from your retirement account may adversely affect your retirement savings, but there are instances when doing so makes sense. Below, we'll look at some of the pros and cons of borrowing from your retirement account.

Loans vs. Withdrawals

First, let's distinguish. Taking a loan is different from making a withdrawal from a retirement account. Both reduce the assets in your 澳洲幸运5官方开奖结果体彩网:portfolio, of course. If your account holds $100,🃏000 and you take out $40,000, you will have a remaining bal🍌ance of $60,000.

However, with withdrawal, you are not required to return the amount distributed from the plan, whereas a loan must be repaid to the plan in order to avoid it being considered a 澳洲幸运5官方开奖结果体彩网:taxable event.

Diversification

Diversification is an important part of 澳洲幸运5官方开奖结果体彩网:retirement planning. Retirement planners usually recommend that assets be diversified according to the risk tolerance of the individual client. While planning is based on the past and projected performance of assets, the risk must be considered, except when it comes to assets that produce a guaranteed 澳洲幸运5官方开奖结果体彩网:rate of return or guaranteed interest.

One of the drawbacks of borrowing from your retirement plan is that the loan amount is no longer being invested and could thus mess up the diversification ratios🍌 until the sum is returned to the plan. Howev🐓er, if assets are sold proportionally this can largely be avoided. Another issue with taking funds out for a loan is that those funds will not be in the market making potential investment gains. Due to compounding, this can have a big impact on the total value of your account far into the future when retirement comes.

However, when you take a loan, the loan amount will be treated as an asset in the plan, as it will be replaced by your 澳洲幸运5官方开奖结果体彩网:promissory note. While the amount will not be diversified, it will receive a guaranteed rate of return, which could be as much as the 澳洲幸运5官方开奖结果体彩网:prime rate plus 2%.

Remember that diversification doesn't eliminate all risk, and the possibility exists that you could have a 澳洲幸运5官方开奖结果体彩网:negative return on your investments unless some of your investments have a guaranteed rate of return. Therefore🉐, the advantage of taking a loan from your account is that you will♓ receive a guaranteed rate of return on the loan amount.

Double Taxation

One of the arguments against taking a loan from your retirement plan is that the amount you repay in interest will be 澳洲幸运5官方开奖结果体彩网:double taxed. This is because the loan 澳洲幸运5官方开奖结果体彩网:repayments, including the interest, will be made with amounts that have already been taxed ♚and will be taxed when withdrawn from the retirement account. However, since the money contributed was pretax and is just being replaced, i൲t is not double taxed. Only the interest portion of the loan payments are double taxed.

“As soon as your after-tax loan repayments hit your 澳洲幸运5官方开奖结果体彩网:401(k) plan, they become pretax, and when you retire and start taking distributions, your loan repayments will be taxed again,” says Michael Mezheritskiy, presid𒈔ent, Milestone Asset🌌 Management Group, Avon, Connecticut. “Hence, double taxation.”

Let's look at an example.

Assumption No. 1

• You contribute $100,000 to your retirement plan on a pretax basis.
• The $100,000 accrues $10,000 in earnings.
• You have never taken a loan from your retirement plan balance.

The $110,000 will be taxed at your 澳洲幸运5官方开奖结果体彩网:income tax rate when withdrawn from your retirement account. Because the $100,000 came from pretax monies, and the earnings of $10,000 accrued on a pretax basis, the $110,000 will be taxed only when withdrawn.

Assumption No. 2

• You contribute $100,000 to your retirement plan on a pretax basis.
• The $100,000 accrues $8,500 in earnings.
• You took a loan of $20,000 from the plan, which you have repaid.
• The interest repaid on the loan is $1,500.

The $110,000 will be taxed at your income tax rate when withdrawn from your retirement account. Since the $100,000 came from pretax monies, and the $8,500 earning🔴s accrued on a pretax basis, the $108,500 will be taxed only when withdrawn.

However, the $1,500 that came from interest 澳洲幸运5官方开奖结果体彩网:repayment on the loan was repaid with amounts that were already taxed, and it will be taxed again when withdrawn from your retirement account. As a result,🦂 you will be paying taxes twice on the $1,500.

Consequences of Failing to Make Repayments

With a few narrowly defined exceptions, 澳洲幸运5官💖方开𒈔奖结果体彩网:loans taken from your retirement account must be repaid at least quarterly, and they must be repaid in level, amortized amounts of 澳洲幸运5官方开奖结果体彩网:principal and interest. Failure to meet these requirements will result in the loan being deemed a taxable distribution, which would incur a 10% penalty as well if you're not at least 59½. It would also mean that you lose the opportunity to accrue 澳洲幸运5官方开奖结果体彩网:tax-deferred earnings on the amount and to make diversified investments 🧸with it.

“I think it is always best not to borrow from a retirement plan unless it is a last resort," says Allan Katz, president of Comprehensive Wealth Management Group, LLC, in Staten Island, New York. "Even though doing so is positioned as a tax-free way to access the capital, it doesn’t always work out that way.”

If you leave your employer before the loan is repaid, you may be required to repay the entire balance within a short period, instead of over the established schedule. If you are unable to repay the balance, the plan may treat it as a 澳洲幸运5官方开奖结果体彩网:distribution (offset).

The loan would thus be treated as ordinary income unless you have 澳洲幸运5官方开奖结果体彩网:available funds to replace the amount as a rollover contribution to an eligible retirement plan within 60 days after the date the offset occurs, or you are eligible to complete a 澳洲幸运5官方开奖结果体彩网:direct rollover of the promissory note to another qualified plan. Loan balances that are treated as distributions are not only subject to income tax, but also may be subject to the 10% 澳洲幸运5官方开奖结果体彩网:early-distribution penalty.

Why Take a Loan from Your Retirement Plan?

You should take loans from your retirement plan only if you have 澳洲幸运5官方开奖结果体彩网:exhauste🥂d your other financing optioꦦns, or if the loan will help to improve your finances. For instance, if you had 澳洲幸运5官方开奖结果体彩网:credit card balances of $20,000 with an 澳洲幸运5官方开奖结果体彩网:interest rate of 15% and you could afford to pay $400 per month, it might make good financ🌳ial sense to take a loan from your retirement plan in order to pay off your credit card balances.

Let's compare the two scenarios.

While it is true that🍒 the $2,351.41 you pay in interest on your loan amount will be double taxed, the obvious benefit is that the interest will be repaid to you, instead of to a credit card company, and the amount you pay in interest will be significantly lower.

If you do take a loan from your retirement account to pay off your 澳洲幸运5官方开奖结果体彩网:credit card balance, make sure you take steps to avoid accruing new indebtedness under the credit cards. Check with your financial planner for assistance in this area—they can also help you ensure that your 澳洲幸运5官方开奖结果体彩网:credit sꦉcore is not ܫadversely affected.

Another good reason for 澳洲幸运5官方开奖结𝔉果体彩网:taking a loan from your retirement account is to use the loan amount to purchase a home. As industry trends show, amounts invested in your home provide a significant 澳洲幸运5官方开奖结果体彩网:return on investment. Furthermore, you could also use your home to finance your retirement, whether by selling the home or by taking a 澳洲幸运5官方开奖结果体彩网:reverse mortgage.

“I recommend borrowing from the retirement plan for capital expenditures such as home repairs or to start a business, and ♛for debt consolidation in certain situations,” says Wes Shannon, CFP®, founder of , in ♉Hurst, Texas. “Never borrow from a retirement plan for education expenses. The government makes easy, low-cost loans available for college, but not for your retirement.”

Check Your Plan Provisions

Not all qualified plans allow loans, and some that do will only allow them for special purposes such as purchasing, building, or rebuilding a primary residence, or paying for higher education or 澳洲幸运5官方开奖结果体彩网:medical expenses.☂ Others allow loans for any༒ reason. Your plan administrator will be able to explain the loan provisions under your retirement account.

Replenish Your Account After You Take a Loan

If you must take a loan from your retirement account, try to continue making contributions and increase the amounts you contribute, where possible. This may be a challenge, as you will also be required to make loan repayments, and those repayments will not be considered contributions to your retirement account. However, it will help you restore your nest egg much faster.

Most plans will allow you to accelerate your loan repayments, which will help to restore your plan balance more quic♊kly. Be sure to factor your loan repayment into your budget. This will keep you from overspending.

The Bottom Line

You should not take a loan from your retirement account unless it is an absolute necessity or it makes good financial sense. Determining whether a loan is right for you requires an assessment of your financial profile and a comparison of the loan option 澳洲幸运5官方开奖结果体彩网:with other options, such as taking a loan from a 澳洲幸运5官方开奖结果体彩网:financial institution (if available) or pa𓄧ying off credit card balances over time.

Be sure to disc🍷uss the matter with your financial planner, so that they can help you decide which option is best for 💫you.