If You Need To Borrow From Retirement Accounts
You’re probably aware that taking money from your retirement funds should only be done as a last resort. The combination of taxes and penalties makes it a very inefficient option. But if you’ve reached a point where there are no other viable options, some scenarios are more attractive than others.
First, if you’re facing immediate documented financial crises, check your 401(k) to see if it allows for hardship distributions. Your program administrator should be able to help you see if you can access these funds without a negative impact. If you’re looking at a short-term financial shortfall, consider borrowing against your IRA. To avoid penalties and taxes you must pay back the loan to the existing or comparable IRA within 60 days. IRAs also have penalty-free distributions in specific circumstances, such as payment of medical bills, college expenses and first-time home buying. In this scenario, the money you withdraw is treated as taxable income. One final option to consider is to borrow from your workplace 401(k). This money is not taxed, but must be repaid at some point. If you wind up leaving your job for any reason, you’ll need to pay back the amount you borrowed immediately in order to avoid taxes and penalties.
Before contemplating any of these actions, it’s always a good idea to discuss things with a financial advisor or tax specialist, to minimize your exposure and maximize your monetary benefit.