When to Take Out a Retirement Plan Loan

A retirement plan loan may be necessary when an individual faces a financial emergency and needs access to their retirement fund.  Most qualified retirement plans such as a 401(K), Tax-Sheltered  Annuity or other plans have provisions that allow an employee to borrow up to a predetermined limit for certain special needs. These plans typically assess special penalties or other interest charges.

Circumstances for a Retirement Plan Loan

If an individual faces any of the following circumstances with no other assets to rely on or family members to borrow from may consider a loan from a retirement plan:

  • Emergency medical expense.
  • Care of a special needs child.
  • Expenses associated with long-term care.
  • Down payment on a home.
  • College education costs for a child or self.

Penalty Fees and Interest Charges

Many of these circumstances may not result in a penalty, particularly if funds are taken out prior to age 59-1/2.  There will be an interest charge applied to the loan and during the time the amount is out of the plan, it will not be earning any interest or rates of return that are applied to other retirement plan assets.  This can reduce the overall retirement plan asset, depending on how long the loan amount is outstanding.

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