Can I borrow money from my retirement plan?

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jul 15, 2021

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Whether or not you can borrow money from your retirement plan is going to depend on how your plan is structured. In some cases, such as with a standard 401K, you can borrow at least a portion of what your retirement plan is currently worth and repay the loan over the course of your employment.

One important benefit of borrowing from a retirement plan over other types of debt is that interest you pay when you borrow from your retirement plan is paid into your retirement account. If possible, however, you should always exercise every other option at your disposal before attempting to borrow funds against your own retirement, both for obvious reasons (you don’t want to take money that you need for retirement) and reasons that you may not see up front. 

The most compelling reason not to borrow against your retirement plan is that you may end up being penalized for acquiring the funds from your account sooner than expected. If you borrow money from your retirement account and you are terminated from your job or otherwise decide to leave your position, in many cases you will need to pay back the money you borrowed immediately or else face early withdrawal penalties on the money. This could create a tremendous financial hardship if you don’t have the money available to you, especially at a time when you have lost your job and presumably your income. Further, by borrowing from a retirement plan, you are reducing the amount of interest and gains your money could potentially be generating in the account.

Borrowing from a retirement plan is a tough decision, so you should consult with a tax attorney or other financial professional before you withdraw funds from your retirement account to ensure you are making the right move for your future. 

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