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There may be times when you need cash and have no option other than tapping your retirement savings plan. The loans available to you are determined by the rules of your employer’s retirement savings plan and governed by federal rules and the rules of your plan.
The loan amount available to you will be determined by both individual plan and federal rules. Generally, the maximum amount available is either $50,000 or one-half of your vested plan balance, whichever is less.
Take a look at this example to see how one small loan can impact retirement savings:
Mary took a five-year retirement plan loan of $5,000 at a 6% interest rate. To pay herself back, she makes bi-weekly loan payments of $48.
While she repays the loan, her reduction in assets (the money she loaned herself) means she'll have $17,686 less than she could have when she retires in 35 years.1
Like all loans, 401(k) loans must be repaid with interest during a specified loan period. If your employment ends, you may be required to repay your loan in full within 60 days. Or it could be considered a distribution, incurring taxes and a 10% penalty if you’re younger than 59½.
Retirement plan loans are taxed twice. Traditional retirement plan contributions are made on a pre-tax basis; loans from your retirement plan are paid back with after-tax dollars. Then, when you retire and start withdrawing your savings (including the loan you repaid) you’re taxed again.
The biggest danger of taking out a retirement fund loan is that it disrupts the dollar-cost-averaging process. Dollar-cost-averaging is the investment of equal amounts of money at regular intervals over time. The economy is always moving up and down. If you invest regularly, you'll have the opportunity to buy more assets when prices are down and fewer assets when prices are up. So, if you borrow from your savings, that money won’t be invested and continuing to work for you as you approach retirement.
Since you are borrowing your own retirement funds, there's no credit check, but loan repayments are withheld from your pay automatically on an after-tax basis.
BB&T offers home, personal, and auto loans, as well as lines of credit, that could better meet your immediate needs and help you keep your retirement savings intact. Learn more about our personalized loan services or contact a BB&T Client Services specialist today.
If you decide to take a loan against your retirement savings plan, you can apply online through PlanTrac or call us at 800-228-8076 for assistance.