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This is in response to the article in Friday’s paper (June 20, page A8) by Jeff Quinn regarding “Need Cash? Borrow from that retirement plan.”
Borrowing from a retirement plan like a 401k should not be done hastily and without considering all the many ramifications.
The tone perceived from Mr. Quinn’s article was that this decision is “no big deal” and not a major move. It should only be done if all other sources of “cash” are unavailable, e.g., a home equity line or a whole life insurance loan, to name a couple.
I dispute the contention that a retirement plan loan is “a relatively cheap way to go.”
I’m not surprised that Mr. Quinn promoted the fact that you pay the interest to yourself. This sounds great, but the readers don’t know the whole story.
To summarize how a 401k plan works, your money (along with any company match) goes into the plan untaxed.
For example, if you earn $100, it goes in as the full $100. There it compounds until it’s ready to be withdrawn at retirement. The Feds then take their taxes, but you get the rest which has been allowed to grow much faster tax-free.
There are three reasons not to take this type of loan:
First: Compound investment earnings on the money while it’s out of the plan (also missed company matching funds during this period) are lost forever.
Second: Although you fund the 401k with money that is “pre-tax,” you pay this loan back with “after-tax” money. For example, in the 25 percent tax bracket, you have to earn $133.33 to yield $100 to pay back the loan.
Third: When you retire and start taking this “loan-payback” money out, Uncle Sam gets to tax this money again.You’re volunteering yourself for double taxation! The Feds just love these loans?!
The current economic climate is poor. However, I would hope those who are suffering educate themselves before they take such drastic action that can severely affect their future retirement income.
William Phillips
Incline Village
Borrowing from a retirement plan like a 401k should not be done hastily and without considering all the many ramifications.
The tone perceived from Mr. Quinn’s article was that this decision is “no big deal” and not a major move. It should only be done if all other sources of “cash” are unavailable, e.g., a home equity line or a whole life insurance loan, to name a couple.
I dispute the contention that a retirement plan loan is “a relatively cheap way to go.”
I’m not surprised that Mr. Quinn promoted the fact that you pay the interest to yourself. This sounds great, but the readers don’t know the whole story.
To summarize how a 401k plan works, your money (along with any company match) goes into the plan untaxed.
For example, if you earn $100, it goes in as the full $100. There it compounds until it’s ready to be withdrawn at retirement. The Feds then take their taxes, but you get the rest which has been allowed to grow much faster tax-free.
There are three reasons not to take this type of loan:
First: Compound investment earnings on the money while it’s out of the plan (also missed company matching funds during this period) are lost forever.
Second: Although you fund the 401k with money that is “pre-tax,” you pay this loan back with “after-tax” money. For example, in the 25 percent tax bracket, you have to earn $133.33 to yield $100 to pay back the loan.
Third: When you retire and start taking this “loan-payback” money out, Uncle Sam gets to tax this money again.You’re volunteering yourself for double taxation! The Feds just love these loans?!
The current economic climate is poor. However, I would hope those who are suffering educate themselves before they take such drastic action that can severely affect their future retirement income.
William Phillips
Incline Village
