If you are in need of money for some sudden or unexpected expenses, you may be tempted to borrow from your retirement account. This can be an easy-to-access source of funds to get you through an emergency situation. Yet some experts warn that this loan doesn’t come without significant costs and responsibilities. Therefore, you should be prepared to get all of the facts before deciding if this is your best option.

The Concept

Most 401(k) and 403(b) retirement plans allow participants to take out a loan from their retirement balance. The details can vary depending on the plan specifics, but the concept is basically the same in most cases. You borrow from the balance you’ve saved, and then agree to pay it back to yourself, along with interest, at prearranged intervals.

How It Works

When you borrow from your retirement, you are basically taking out a loan the same way you do when you take out a mortgage or a car loan. The specifics of the loan can vary from plan to plan, but the general guidelines restrict the amount you can take in any plan to be half of vested balance, up to a maximum of $50,000. (However, if you have less than $10,000 vested, then you can often take out the full amount.) Repayment is usually arranged over a time period of one to five years.

The Pros And Cons

On the surface, borrowing from your retirement fund may seem like a very good idea. Since you are borrowing the money from yourself, there is no credit check needed and often you can access the money quickly and easily. In addition, you make your payments, along with interest (usually one or two percent over prime), back into your own account, rather than giving the money to a bank or other institution. This can be an appealing concept.

On the flip side, though, some plans require you to stop making contributions until your loan is paid back. And if you normally get an employer match, this means you are missing out on this benefit as well. Further, when you withdraw your money while the stock market is down, you may sell your stock at a loss. Or, if you sell when it’s up, you may miss out on further gains and may also have to spend more to buy the stock back later, so there are missed growth opportunities that you must factor into the equation, particularly when you realize that the larger your balance, the faster the money grows for your future, and vice versa.