SURVIVAL TIPS: From time to time, we’ve been passing along some
financial tips from the Pennsylvania Institute of Certified Public
Accountants. More today, this time on your company’s retirement
plan.
Don’t withdraw. Borrow. A troubled economy takes its toll,
resulting in job losses, home foreclosures, and tighter credit.
Faced with a financial emergency, many people scramble to find
available cash. At such times, the money in your qualified company
retirement plan may seem like a great resource. Tapping into your
retirement plan may be an acceptable step, but only in the absence
of other borrowing options.
With any tax-advantaged retirement account, it’s significantly
better to take a loan rather than withdraw the funds outright. If
you take a withdrawal before you reach the age of 59 1/2, you will
be subject to a 10 percent penalty on the amount you take and you
will also have to pay income tax on that money. If you withdraw
,5,000, you will owe the IRS a ,500 penalty as well as tax on that
withdrawal.
Loan benefits. A retirement plan loan can have an advantage over
other borrowing options. First, instead of paying interest to a
lender, you will be paying interest to yourself. In addition, the
interest rate on such loans is typically lower than what you would
pay on credit card balances or other commercial debt.
Drawbacks. One major drawback to a loan is that you lose the
investment potential of any money you borrow. Let’s say you have
,5,000 in a retirement plan, and during the coming year that
investment will earn 5 percent, or ,250. If you borrow that ,5,000
from your retirement plan, you miss out on the chance to earn the
,250.
Slippery slope. It is also important to avoid getting into the
habit of treating a retirement account as a source of ready cash.
If you interfere with that growth potential by taking regular loans
from a retirement plan, you will cheat yourself out of what could
amount to thousands of dollars in retirement nest egg funds over
time.
TODAY’S QUOTE: “We are the only animals that let our kids come
back home,” said comedian Bill Cosby
