Cashing Out and Borrowing from Retirement Accounts

If you are like most people, your 401(k) account represents your largest savings account. When you need to access funds in a personal financial crisis, it’s understandable why you may consider borrowing from your 401(k) account or withdrawing from your 401(k) or IRA. After all, it’s your own money, and, in the case of a loan, the interest paid goes into your retirement account. But, before proceeding with this, you should understand how borrowing from your 401(k) works and make sure that you understand the options. Borrowing or withdrawing from your retirement account prematurely should only be done when there really isn’t another option.

If you are still working for your employer, you likely have the option to borrow against your 401(k). There are a few negatives that must be considered before you choose this option.

  • Withdrawing from your 401(k) means that you are missing out on any potential gains in your account.
  • Many plans prevent you from contributing while you have an outstanding loan.
  • Repayments must be made with after-tax dollars, while the original contributions were made with pre-tax dollars.
  • If you quit your job or are laid off while your loan is still outstanding, you will have to repay the loan immediately, or it will be considered a withdrawal. With a withdrawal, you will be accessed a 10 percent penalty and be required to pay taxes.

If you have Individual Retirement Accounts (IRA), you aren’t able to take a loan from them. IRA owners can withdraw money at any time with a penalty; however, there are some exceptions that permit you to withdraw your money penalty free. Some of these include:

  • Some higher-education costs can be paid with penalty-free IRA withdrawals; however, you still have to pay taxes on the money.
  • First time homebuyers can withdraw money with no penalty, up to a limit of $10,000.
  • Certain medical expenses can qualify you for a no-penalty withdrawal.
  • Reaching age 59 ½. Once you are of the age 59 ½ you can make withdrawals with no-penalty for living expenses.

Keep in mind–with both withdrawals and loans, you will be missing out on any gains in the market if you take your money out prematurely. It can take quite a bit of time to recover, so you should consider using these two accounts for anything other than retirement only in an emergency. 

  • The Consumer Federation of America (CFA) is 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.
  • The National Council of Higher Education Resources (NCHER) is the nation’s oldest and largest higher education finance trade association. NCHER’s membership includes state, nonprofit, and for-profit higher education service organizations, including lenders, servicers, guaranty agencies, collection agencies, financial literacy providers, and schools, interested and involved in increasing college access and success. It assists its members in shaping policies governing federal and private student loan and state grant programs on behalf of students, parents, borrowers, and families.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.