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Borrowing from our retirement
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ATLANTA — The troubled economy has resulted in job losses, home foreclosures and tight credit. Faced with a financial emergency, many people scramble to find cash. At such times, the money in your qualified company retirement plan may seem like a great resource. Tapping into your retirement plan can be acceptable in the absence of other options.  Here’s a look at how to make the most of this option and mistakes to avoid.

Interest advantages
A retirement plan loan has a number of advantages over other borrowing options. First, instead of paying interest to a lender, you are actually paying interest to yourself, a much more rewarding prospect. In addition, the interest rate on such loans is typically lower than what you would pay on credit cards or other debt.

No credit check
It has been difficult for many people to get credit recently. That’s not a problem with your retirement plan because you are essentially the lender. There are no credit checks or negotiations necessary. The paperwork is relatively uncomplicated and you can arrange to have payments deducted from your paycheck, making it easy to pay the loan and incorporate into a budget.

Drawbacks to consider
While there are relative benefits to a retirement plan loan, there are also disadvantages. One major drawback is you lose the investment potential of money you borrow. Let’s say you have $5,000 in a plan, and during the coming year it will earn 5 percent, or $250. If you borrow that $5,000 from your retirement plan, you miss out on the chance to earn the $250. The lost earnings are a “hidden” cost of your loan.

The slippery slope
If you borrow from a retirement plan, it’s also important to avoid getting into the habit of treating the account as a source of cash. CPAs advise that setting up a retirement account should be the priority. The earlier you begin saving, the more time that your money has to grow. If you interfere with that growth by taking regular loans, you will cheat yourself out of what could amount to thousands of dollars in nest egg funds over time.

Borrow but don’t withdraw
After weighing the advantages and disadvantages, you may still decide to tap into your retirement. Remember, though, that with any tax-advantaged retirement account, it’s significantly better to take a loan rather than withdraw the funds outright. When you take a withdrawal before you reach the age of 59½, you will be subject to a 10 percent penalty on the amount and you will also have to pay income tax on it. If you withdraw $5,000, in other words, you will owe the Internal Revenue Service a $500 penalty as well as tax on that withdrawal.   

Consult your CPA
Many people are struggling with complicated financial decisions in the current economy. Remember that a CPA can help. He or she has the expertise to advise you on the best choices.
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