With gas prices creeping to the $5 mark, I have a feeling that many of us are going to be cash poor very soon. That’s if you aren’t already digging out of debt from losing a job or getting your hours reduced when the economy first started taking a nosedive.
Getting out of debt can be very challenging. While some people, whose debt has grown out of control, turn to consumer credit counselors, others take matters into their own hands. Studies show more and more people are borrowing from retirement accounts in order to pay down debt. The problem with this solution is that it may not be the right option for everyone.
For starters, not all retirement accounts are eligible for loans or withdrawals. Pension plans, 401(k) plans, and 403(b) plans typically allow people to borrow funds, but many come with strict stipulations. For example, in most cases, you will not be able to borrow more than $50,000 or 50 percent of the amount you’ve invested into your 401(k) plan. It’s true that you can legally borrow up to $10,000 from a retirement plan regardless of your investment; however, additional security is needed to do so.
Still, if you are desperate for money and have debt collectors knocking on your door, borrowing from your retirement account may not be a bad idea. After all, there are some perks to doing so when times get tough. One of the benefits is the fact that you have up to five years to pay back the loan before IRS fees and taxes start to accrue. Also, taking out a loan from your retirement account guarantees a rate of return, since you are basically paying yourself back. Finally, if you are borrowing the money in order to pay down credit card debt, the loan interest rate from your retirement account may be less than the one being charged by the credit card company, which means you can save money in the long run.