Loans and retirement:
While I generally don't like to see folks borrow against their retirement plan, it actually does make sense in at least a few cases
It provides you with access to your retirement plan money (within limits) without getting hit with the 10% early distribution penalty for distributions prior to age 59 1/2.
You basically pay interest to yourself on the loan -- which is much better than paying interest to a commercial lender, bank, S&L, or credit union.
Retirement plan loans are generally easy to obtain. And there are not a lot of expenses attributed to them. And if you're credit is less than golden, you might find it easier and cheaper to borrow from your retirement plan than from a commercial lender.
Who can get a retirement plan loan?
Remember that loans are only allowed if the plan allows for them. In this day and age, most plans do allow for loans to participants, but if you're thinking about tapping your retirement plan for a loan, make sure that you check with the benefits folks at your place of employment before spending the cash.
Generally, the maximum amount that you can borrow is the lesser of $50,000 or 50% of your vested account balance in the plan. So the funds that you can get your hands on aren't insignificant, depending on the balance in your account. Also, most plan loans are secured exclusively by your vested account balance -- there is no additional collateral required.
The tax code allows for a loan of up to $10,000 regardless of your vested account balance in the plan. But ERISA (Employee Retirement Income Security Act) rules require the plan to obtain additional security for any loan amount in excess of 50% of your vested balance. Because of this dichotomy in the rules, most plans simply allow for loans that don't exceed 50% of your vested balance.
07-18-2006, 10:02 AM
loans and retirement
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