If you borrow against your retirement account
We've been alarmed at the number of families who are either withdrawing or borrowing from their retirement plans in this uncertain economy.
This, as the future of many company pension plans remains a question.
Of course, if you need the money, you may have no other option than to take from your retirement kitty.
But your family might wish to consider other possible solutions first. Among those: Negotiating interest rates with your creditors and making sacrifices to pay down debt.
There are some advantages to a 401(k) loan. They're easier to get than a traditional bank loan these days. The interest rate also is apt to be lower.
The IRS says that you can borrow up to 50 percent of your vested account balance or $50,000, whichever is less. You have five years to repay the loan. Those who have borrowed money for their first home get more time to repay it.
However, fail to repay the loan as required, and you pay ordinary income tax on the money and a 10 percent early withdrawal penalty if you are under 59 years of age.
Geng Li and Paul A. Smith have argued in a Federal Reserve published study that households could have saved about $275 each annually in 2007 if they had borrowed from their 401(k) rather than taking other loans.
On the other hand, 401(k) plans were hit particularly hard in 2008 -- despite declining 401 (k) plan balances, reports the Employee Benefit Research Institute.
That's because the market values of workers' retirement accounts declined in 2008 from 2007. Unpaid loan balances were 16 percent of their account balances.
Among participants with outstanding 401(k) loans at the end of 2008, the average unpaid balance was $7,191, compared with $7,495 in the year-end 2007 database.
If you borrow from your 401(k), be sure you understand the pros and cons.
• On the plus side, you can borrow the money without a credit check. You don't have apply for a loan.
• The interest rate on a 401(k) loan is apt to be lower than a loan you could get from a bank, credit union or savings and loan.
The drawbacks:
• You generally must repay the loan in five years. So you need to be certain you can set aside money each month to repay it in that time frame. Borrow $5,000, and consider repaying at least $1,000 each year.
• Since you've borrowed money out of the account, you have a lower investment balance. Consider that besides the risk of taxes and penalties if you fail to repay the loan, your retirement stash won't grow as much.
Other options besides borrowing from your 401(k): Use an asset, such as a deposit account, if you have one, to get a collateralized loan from your bank. This also is generally subject to a lower interest rate.
Try and get a home equity loan or borrow against the cash value of your life insurance policy. At least interest from a home equity loan may be tax-deductible. Beware, though, that you may lose your home if you can't make payments.
On life insurance, typically, you can borrow at a very low interest rate against your cash value or savings account portion of the loan. You don't have to repay it. Unfortunately, though, you've just reduced your life insurance death benefit by the amount of the loan and accumulated interest.
Spouses Gail Liberman and Alan Lavine are syndicated columnists. Their latest book is "Quick Steps to Financial Stability" (Que/Penguin). You can contact them at www.moneycouple.com.
