Money

Don't Plunder Your Retirement Account!

The temptation to borrow from your 401(k) may be powerful, but it's one you should resist — and here's why

Most of us understand how important it is to keep the money we save in retirement accounts, like our 401(k)s, strictly for retirement. But it can be all too tempting to borrow from your future self when you’re currently struggling financially.

According to a new survey by TIAA-CREF, that temptation is all too real for many Americans: Nearly one-third have taken out a loan from their retirement savings, and of those who have, 43 percent have taken out two or more.

RELATED: Another Reason Not to Plunder Your 401(k)

The most common reason cited for borrowing was getting out of debt (46 percent), followed by paying for an emergency expenditure (35 percent) and purchasing or renovating a home (26 percent). Other reasons include paying the bills after losing a job, paying for education costs and financing a special event like a wedding. Nearly half of people who said they’d borrowed from their retirement accounts took more than 20 percent of their savings.

Interestingly, the survey found there were some gender differences when it came to how the money was used: Women were more likely to use their loan to pay off debt, while men were more likely to use it to pay for an emergency expenditure.

RELATED: Retirement Savings Have Doubled

Unfortunately, borrowers don’t seem to be doing enough to replenish the savings they are taking out: The majority (57%) of respondents said that, while paying back the loan, they also reduced the amount of their retirement contributions—with 18- to 34-year-olds most likely to do so.

So is borrowing from a retirement account like a 401(k) — even to get rid of debt — ever a wise move? While there could be some extreme exceptions to the rule, in short, the answer is: not really. You’re missing out on the growth that money could have been making if it had stayed invested, and you’re subjecting yourself to the risk of early-withdrawal penalties.

RELATED: Retirement Myths That Can Wreak Havoc on Your Nest Egg

And despite their actions, Americans do seem to realize that borrowing from retirement accounts isn’t necessarily the wisest of decisions: According to the survey, a whopping 44 percent said they later regretted the decision to borrow.

Tags: retirement
   
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