withdraw or borrow from retirement?
Everyone says never withdraw or borrow from retirement, but I think every situation is different. I'm 35 and have 130k in retirement (which I consider to be a respectable amount for my age). I put alot in early and it paid off for me. I recently got divorced and rather than give my ex 50% of my retirement, I choose to basically pay her 40% now. I assumed some of her debt and gave up my half of the equity in the marital home. Unfortunately, now I am a little strapped for cash. I am prepared to borrow $50k from retirement, but would like some advice. My thinking is borrow the money, but double my pre-tax investment from 5% to 10%, that way over time my retirement will be ok. Negative is that I will have a short paycheck for 5 years. Another option is just to withdraw $50k, but I know the taxes and penalties will kill me. I don't know the specifics on that. Any advice? To clarify, my job is extremely stable. I'm an engineer for the federal gov and do not plan leaving.
Public Comments
- Borrow because the payback will be over a period of time with future inflated dollars with could be better afforded
- Borrow the money. You won't have to pay an early withdrawal penalty. I know the down side is having a short paycheck for a few years, but it will save you a fortune in the long run.
- Work some OT, get a second or third job or sell some stuff. Borrowing from a 401k is a bad choice. If you decide to leave your job or you get laid off, you will have to pay the whole loan off immediately or it will be treated like a w/d. Also, you cannot make extra payments on the loan, you can only pay it out or pay it off in a lump sum. Finally, if you borrow from a retirement account at work, you look fiscally irresponsible to those in payroll/accounting/management. Depending on the size of the company & your position in it, that may not make a heck of a lot of difference to you, but it is a consideration. You are on a roll w/ saving for retirement. Don't blow it by doing something stupid. Dave Ramsey is pretty good at explainign this stuff to people. Check out his website or radio show or book if you want more info. You would probably jive w/ most of what he teaches. You sound like a pretty sharp, conservative guy.
- Are we talking borrowing from 401 k.borrowing is a wrong idea.God forbid if you loose your job for any reason you have to come up with money to pay off your debt at once and penalties are sever
- You're 100% right...every situation is different. It might be an appropriate thing for you to do. First I would want to know is safe is your job. The answer needs to be 100%. If you were to leave, quit, get fired, laid off or whatever while the loan is outstanding then you will have to either convince your new employer to allow you to rollover the loan or it will become taxable to you and you'll owe taxes AND a 10% penalty. If it happens in year one you're looking at quite possibly $20k in taxes. Don't even bother with the withdrawal for that same reason. Paying 20k to get 30k is not worth it under any circumstances. And, not likely you could get that much without quitting anyways. And being short from a divorce is not reason to allow for a hardship so doubtful withdrawal is even an option. I ran numbers assuming 7,500/yr in deferrals, 8% return and 8% interest on loan. Without the loan you end up with 2.74 million at age 67. Stopping your withdrawals for 5 years with no loan and you end up with 2.36 million. Taking a loan of 50k, making just the loan payments for 5 years then restarting deferrals also gets you 2.36 million. Taking a loan of 50k making loan payments and 7,500 deferrals gets you back up to around 2.75 million again. Simple calcs yes and don't include inflation but you get the gist. So, you can see...taking the loan and just paying it back while not continuing to defer is no better or worse then stopping your deferral and you don't have the possibility of default hanging over your head. And taking the loan won't kill you if you can afford to make the payments and keep your deferral rate. So it's up to you...and your personal situation? Will you still be at same company in 5 years, can you afford to pay back 1k a month AND continue to defer 5% of your income? If so...take the loan.
- The above advisement on the end effect is good. However, I am not sure I have a picture of your use of the 50k. If it is to get into a house, well, now, or waiting a bit longer would seem to be the ideal time, so your instinct to take advantage of the real estate slump is superb. Other reasons such as paying off high rate debt, would also seem reasonable, as well as all medical, school and family needs. Best of luck, and with the recent market activity you might even withdraw and put the cash straight into t bills while this rocky volatility settles.
