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Borrow From Yourself

“A bank is a place that will lend you money if you can prove that you don’t need it.” 

-Bob Hope

It’s one of those classics that falls into the ‘It’s funny because it’s true’ category.

Really, it’s not funny.  But, it does seem to be true.  Since the Great Recession of 2008, middle income Americans are finding it harder than ever to borrow money from banks.  Tightened regulations implemented in 2009 are causing bank lenders to look for near perfect credit qualifications in order to make loans for mortgages, auto purchases and even for small business owners. Ultimately this means that many hard-working, average Americans may not have access to the money they need in order to experience life the way they want. Instead, they may have to dip into their savings or curtail savings all together in order to meet their needs.

Working Americans that are currently saving in a 401(k), 403(b) or 457(b), may be able to take advantage of a clever solution that can meet their needs for credit right now, without sacrificing their long-term future.  Many IRS recognized employer-sponsored retirement plans offer loan provisions that allow participants to borrow against their retirement savings.  These loans are provided without a credit inquiry, are not reported to credit bureaus and are generally offered at much lower loan rates than traditional financing institutions.   As long as the terms on the loan are fulfilled, you will have the advantage of accessing the money for your needs today and you can hold onto your retirement savings for the future.  To determine if a loan makes sense for you, you will also want to weigh the benefit of the loan against the loss of potential earnings if the dollars had remained in the plan and how that might affect your retirement savings.

Whether or not loans are permitted is dependent on the plan.  To determine if your plan offers a loan provision, you can check with your benefits manager at work or the administrator of your plan.  Loans from these retirement plans are also subject to all rules and guidelines established by the IRS.

Qualified plan loans are generally limited to 50% of your vested account value, capped at $50,000, and must be paid back in 5 years or less.  Any loan balance remaining at the end of 5 years, due to default of repayments, or upon termination of employment, may be subject to ordinary income tax and a 10% federal tax penalty.

For more information on loans from a 401(k), 403(b) or 457(b) plan, view this  IRS publication.