Retirement plan loans and withdrawals

A loan or withdrawal from your retirement account can be tempting. However, it may set back your retirement savings more than you think.

Consider the pros and cons of a retirement plan loan

Taking a loan from your retirement plan can seem like an easy fix for a surprise expense. You take a retirement plan withdrawal from your account, usually at a low interest rate, and pay yourself back through payroll deductions. But beware the potential pitfalls:

  • You may pay a one-time loan origination fee and a maintenance fee.
  • You may miss out on earnings on the loaned amount. (For example, if you borrowed $10,000 from your account for three years, you could lose nearly $2,000 in returns, assuming your account earned a 6% annual return over that period.)
  • If you leave your job, you may have to pay your loan in full within 60 days. If you can’t, you’ll pay a 10% penalty—and income taxes—on the balance.

Take a retirement savings withdrawal as a last resort

Your plan may allow you to withdrawal from your retirement savings for a first-time home purchase or an emergency (such as medical or funeral expenses). Withdrawals have stricter rules and bigger consequences. When you take a withdrawal from your plan:

  • You won't be able to repay your account. You’ll set back your savings. And you’ll be suspended from saving in your account—and receiving any employer match—for a period of time (often six months).
  • You must document your financial need.
  • If you don’t meet the qualifications for financial need, you may have to pay a penalty.
  • If you withdraw pretax savings, you’ll also be required to pay the full amount of taxes on your withdrawal.

Carefully consider the effects

When you take money out of your account, the effect on your final retirement balance can be much larger than the retirement withdrawal itself, because your balance and the amount you could earn over time will be reduced.

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