Retirement plan loans and withdrawals

Taking a loan or withdrawal from your workplace retirement plan may seem like an easy fix for a surprise expense. After all, it’s your money, right? As tempting as it may look, it could set back your retirement savings more than you think.

Be mindful of hidden loan costs

The process sounds straightforward: You take a loan from your account, and you pay yourself back. Unfortunately, it’s likely that you’ll pay for a lot more:

  • The loan will accrue interest, adding to the total amount you owe.
  • Depending on the plan, your loan may be subject to additional fees, such as a one time loan origination fee and maintenance fees.
  • Since your account now has a lower balance, you’ll miss out on any potential earnings on the loaned amount.
  • If you leave your job, you may have to pay your loan in full within 60 days. If you can't repay the loan, you'll owe income taxes, and you may owe a 10% penalty on the outstanding balance.

Assess early withdrawal penalties

Your retirement plan may allow you to withdraw money early due to an immediate and heavy financial need, such as education fees, medical or funeral expenses, or the purchase of a principal residence.1 Unlike loans, hardship distributions require you to provide documentation of your financial need and are limited to the amount necessary to cover the hardship. While circumstances may lead you to consider taking an early withdrawal from your plan, the negative effect on your savings can be much greater than you anticipated:

  • Most distributions can't be repaid to your plan, permanently reducing your account balance and potential earnings.
  • Your plan may limit or suspend your current contributions, further reducing your retirement savings’ growth potential.
  • You must pay income tax on any previously untaxed money you receive as a hardship distribution.
  • If you're under age 59½ and don't qualify for an exception , you may owe a 10% penalty for taking an early distribution.

Consider the long-term effects

The bottom line: Taking a loan or withdrawal from your retirement savings may seem like a good idea at first, but the potential downsides outweigh the advantages.

If you need assistance deciding your course of action, your retirement plan representative can help you understand your options and review associated consequences.