Short-term fixes can have long-term consequences

According to a recent study by AARP, many Americans are risking their financial futures in order to fulfill with an immediate need.  In fact, 23% of consumers surveyed by AARP said that they have prematurely tapped their retirement funds.  A survey by Transamerica Center for Retirement Studies found that 18% percent of workers had a loan outstanding from their retirement plan in 2007, up from 11% in 2006.

If you plan to borrow from your 401(k) retirement plan, be careful.  Plan loans usually charge the prime interest rate plus one or two percentage points.  Because the interest you pay goes right back into your 401(k) account, you might think of this as a "free" loan.  Not so.  In fact, it could cost you more than the stated rate.  Say you borrow from your plan at 10% but the cash you pull out has been earning 12% in the stock market.  You are losing out on the additional earnings.  And you lose future compounding on these lost earnings.  In time, that could amount to quite a nest egg.

Another potential problem is that if you quit or lose your job, your loan may be due immediately.  This could be at a time you may least be able to afford to pay back the loan.  If you can't pay back the loan, the loan is considered a distribution.  That means you will owe taxes on this distribution and, if you are under age 55, you will get hit with a 10% early withdrawal penalty too.

For more about the cons of borrowing from your retirement, read this post by Linda Rowley.

Kim McGrigg is the former Manager of Community and Media Relations for MMI.

  • Better Business Bureau A+ rating Better Business Bureau
    MMI is proud to have achieved an A+ rating from the Better Business Bureau (BBB), a nonprofit organization focused on promoting and improving marketplace trust. The BBB investigates charges of fraud against both consumers and businesses, sets standards for truthfulness in advertising, and evaluates the trustworthiness of businesses and charities, providing a score from A+ (highest) to F (lowest).
  • Trustpilot Trustpilot
    MMI is rated as “Excellent” (4.8/5) by reviewers on Trustpilot, a global, online consumer review platform dedicated to openness and transparency. Since 2007, Trustpilot has received over 116 million customer reviews for nearly 500,000 different websites and businesses. See what others are saying about the work we do.
  • Consumer Federation of America Consumer Federation of America
    MMI is a member of the Consumer Federation of America (CFA), an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • Department of Housing and Urban Development Department of Housing and Urban Development
    MMI is certified by the U.S. Department of Housing and Urban Development (HUD) to provide consumer housing counseling. The mission of HUD is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD provides support services directly and through approved, local agencies like MMI.
  • Council on Accreditation Council On Accreditation
    MMI is proudly accredited by the Council on Accreditation (COA), an international, independent, nonprofit, human service accrediting organization. COA’s thorough, peer-reviewed accreditation process is designed to ensure that organizations like MMI are providing the highest standard of service and support for clients and employees alike.
  • National Foundation for Credit Counseling National Foundation for Credit Counseling
    MMI is a longstanding member of the National Foundation for Credit Counseling® (NFCC®), the nation’s largest nonprofit financial counseling organization. Founded in 1951, the NFCC’s mission is to promote financially responsible behavior and help member organizations like MMI deliver the highest-quality financial education and counseling services.