Participating in the company’s retirement plan is a smart (and important) decision. Smart because you are putting away small amounts today for a comfortable retirement later.
As your account begins to grow, it may be tempting to “dip into” your retirement savings by taking a loan against your retirement plan to pay your annual taxes, repair a leaking roof, catch up on your everyday pile of bills and so on. And while the decision to take a plan loan is yours to make, we want to ensure that you consider what it will really cost.
With a retirement plan loan, you pay yourself back the amount plus interest. But the true cost can be shown with the loss in your retirement savings. You lose money when you borrow from your retirement account for several reasons.
- You lose making money on the earnings, or compounding of those earnings.
- You repay the loan with after-tax dollars.
- There is (typically) an initial set-up and quarterly loan fee.
- Most employees decrease the amount they are contributing in order to compensate for the loan payment.
- You may not be paying yourself back the same amount you would have earned if you left the money invested (you pay yourself 7 percent, but could make 10 percent).
To further illustrate the costliness of taking a plan loan, consider the following hypothetical example*:
Jane took a $10,000 loan at 7 percent interest from her retirement account; her account balance before the loan was $20,000. She previously made contributions of $150 per paycheck (including the employer match). Because she had to repay the loan, she decreased her contribution to $50. Additionally, prior to the loan, she was earning a 10 percent return. Now she will repay the loan over five years. If you take into account loss of interest, compounding, and tax on repayments, the actual retirement plan loan is costing Jane 13.77 percent! Don’t forget about those decreased contributions, which can add up to hundreds of thousands of dollars over many years.
For more information on retirement plan loans, contact Allison Winge at at (847) 307-6227 or awinge@plexusfs.com
*This example is hypothetical and intended for illustrative purposes only. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney or tax advisor with regard to your individual situation.
This material is not intended to replace the advice of a qualified attorney, tax advisor, investment professional or insurance agent.
ACR#265662 11/17
Plexus Financial Services, LLC (“PFS”) does not provide specific investment, tax, and/or legal advice and the information referenced/provided is not specific to any company’s or individual’s circumstances. These materials are general in nature and provided for educational purposes based upon publicly available information from sources believed to be reputable and reliable; we cannot assure the accuracy or completeness of these materials and as a result, personal diligence should be completed before relying or acting upon the information presented. Any general information referenced/provided is not be construed as personalized investment, tax, and/or legal advice. Always consult an advisor, attorney and/or tax professional regarding your specific situation.
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