Consider the pros and cons
It’s possible your employer has offered the option of borrowing from your workplace retirement plan savings. While your account is designed to act more like a nest egg than a piggy bank, it’s nice to have the flexibility to access funds if you have to before retirement.
You’ll want to keep in mind, however, the effects a loan may have on your future contributions, investment earnings, and taxes. Once you’ve considered the ins and outs of how a retirement plan loan works, you’ll be able to make a good decision when you’re tempted to grab the cash.
How does a retirement plan loan work?
First, understand that plans differ on how loans are administered, and all plans must follow certain federal rules. You’ll want to check with your employer to understand loan rules specific to your plan.
When you take a plan loan, you borrow from the amount you’ve already saved. You’re not borrowing from an employer or a lender.
So let’s say you have $40,000 in your account, and you’ve determined that you need $10,000 in cash. You can take a $10,000 loan from your own savings, leaving you with $30,000 in your plan. You receive a check for $10,000 that you can use as you please. Disclosure 1
How much can I borrow?
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.
How do I pay my loan back?
When you take a loan, you also commit to pay it back. You’ll agree to a term and a monthly payment amount, including interest, to be deducted from your paycheck. The amount deducted is after-tax, so those particular contributions will no longer be part of your tax-deferred benefit.
What are the downsides to taking a loan?
You should know there are several reasons not to take a loan from your retirement plan unless you absolutely have to.
- If you leave your employer, you may be required to repay your loan in full within 60 days. For large, outstanding loan amounts, this might be difficult. If you can’t pay it back, it may be considered a distribution. In that case, you’ll be subject to paying taxes on your outstanding loan balance, as well as a 10% penalty if you’re younger than 59 ½.
- The interest you pay will actually be taxed twice: once when it comes out of your paycheck, and again in retirement when it’s taxed the same as your pre-tax contributions.
- It can be hard to continue making plan contributions when you’re already deducting your pay to repay the loan. Suspending plan contributions could cause you to miss out on free money if your employer offers a match. On top of that, you’ll disrupt the potential benefit of dollar-cost averaging, an investing technique generally considered to be wise in retirement plans. Both of these factors could delay your retirement goals.
Is there a good reason to take a loan?
Borrowing from your plan doesn’t require a credit check, and you’re not paying interest to someone else. Also, interest rates on retirement plan loans are relatively low and typically less burdensome than other types of credit.
The process of taking a loan from your retirement plan is simple, and it doesn’t take long to get your check. Because of this, it’s one of the easier ways to access cash. If you have a financial goal that requires cash, like paying down bad debt or starting a business, borrowing from your plan can be a reasonable option. Just remember that the loan should typically be a last resort.
The bottom line
If you’re thinking about a retirement plan loan, remember the associated risks and tax implications. A retirement plan loan should be your last resort for accessing cash, and you should consider looking into other borrowing options. BB&T offers home, personal, and auto loans, as well as lines of credit that could better meet your immediate needs and help keep your nest egg intact.
Loan administration fees may apply.
Traditional banking services are provided by Truist Bank, Member FDIC.
Only deposit products are FDIC insured.
The information provided should not be considered as tax or legal advice. Please consult with your tax advisor and/or attorney regarding your individual circumstances.
Investment and Insurance Products:
• Are not FDIC or any other Government Agency Insured • Are Not Bank Guaranteed • May Lose Value
Truist, BB&T®, BB&T Securities®, BB&T Sterling Advisors, Sterling Capital®, BB&T Investments, BB&T Scott & Stringfellow®, SunTrust®, SunTrust PortfolioView, SunTrust Robinson Humphrey®, SunTrust Premier Program®, AMC Pinnacle®, AMC Premier®, Access 3®, Signature Advantage Brokerage, Custom Choice Loan®, SunTrust SummitView® and GFO Advisory Services® are service marks of Truist Financial Corporation. All rights reserved. All other trademarks are the property of their respective owners.
Services provided by the following affiliates of Truist Financial Corporation: Banking products and services, including loans and deposit accounts, are provided by SunTrust Bank and Branch Banking and Trust Company, both now Truist Bank, Member FDIC. Trust and investment management services are provided by SunTrust Bank and Branch Banking and Trust Company, both now Truist Bank, and SunTrust Delaware Trust Company. Securities, brokerage accounts and /or insurance (including annuities) are offered by SunTrust Investment Services, Inc. and BB&T Securities, LLC, and P.J. Robb Variable Corp., which are SEC registered broker-dealers, members FINRA, SIPC, and a licensed insurance agency where applicable. Investment advisory services are offered by SunTrust Advisory Services, Inc., GFO Advisory Services, LLC, BB&T Securities, LLC, Sterling Capital Management, LLC, Precept Advisory Group, LLC, and BB&T Institutional Investment Advisors, Inc., each SEC registered investment advisers. BB&T Sterling Advisors, BB&T Investments and BB&T Scott & Stringfellow are divisions of BB&T Securities, LLC. Mutual fund products are advised by Sterling Capital Management, LLC. Mortgage products and services are offered through SunTrust Mortgage, a tradename for SunTrust Bank now Truist Bank.
The information contained herein is for informational purposes only and does not represent an official statement of your SunTrust Investment Services, Inc. account. Please refer to your monthly or quarterly statements for a complete record of your transactions, holdings, and balances.
"SunTrust Advisors" may be officers and/or associated persons of the following affiliates of Truist Financial Corporation: SunTrust Bank now Truist Bank, our commercial bank, which provides banking, trust and asset management services; SunTrust Investment Services, Inc., a registered broker-dealer, which is a member of FINRA and SIPC, and a licensed insurance agency, and which provides securities, annuities and life insurance products; SunTrust Advisory Services, Inc., a SEC registered investment adviser which provides Investment Advisory services.
SunTrust Private Wealth Management, International Wealth Management, GenSpring, Business Owner Specialty Group, Sports and Entertainment Group, and Legal and Medical Specialty Groups are marketing names used by SunTrust Bank now Truist Bank, SunTrust Investment Services, Inc., and SunTrust Advisory Services, Inc.
SunTrust Robinson Humphrey is the trade name for the corporate and investment banking services of Truist Financial Corporation and its subsidiaries, including SunTrust Robinson Humphrey, Inc., member FINRA and SIPC.
Branch Banking and Trust Company, Member FDIC.
Branch Banking and Trust Company is now Truist Bank. Learn more.
BB&T and SunTrust have merged to become Truist. Both institutions will continue to offer independent product lines for a period of time. This may include differing underwriting guidelines, product features, terms, fees and pricing. Our friendly teammates at your local SunTrust branches will be happy to walk you through their respective products. You can also learn more by contacting them at 800-SUNTRUST or SunTrust.com.