Borrowing from Retirement Plan


Retirement plans are mainly framed for assisting people once they retire. Retirement funds would provide valuable source of money that can be utilized by them for their day to day activities. Financial experts advise people to save as much money as possible in their savings account as it would prove to be a vital asset in the future. None of them advise borrowers to make use of the money that is available in the retirement scheme. Certain retirement accounts do not allow the person to utilize the money they possess in their savings account.

The main reason why financial advisors do not recommend taking up a retirement plan loan is that there is chance of losing access to an ample sum of amount in the future once they retire. Due to certain unavoidable circumstances, one would be forced to take up retirement loans. There are both advantages and disadvantages to those who choose retirement plan loans.


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Retirement loan process

Retirement plan loans work this way, the loan would be dispersed based on the amount maintained in the person’s retirement savings account. The lender would take up a portion of the amount present in the retirement account and would disperse the loan based on that. The person would be able to get access to this particular retirement account through this loan and once the borrower starts to repay the loan slowly, it would be just like adding up the amount obtained as the loan back to the retirement savings account.

In certain cases, borrowers might be left with two options based on their retirement plan account and they include withdrawal of money from the account and the second one is obtaining a retirement loan from the retirement savings account. The benefits of these two methods would differ based on the type of lender performing it.

401(k) loan is one such kind of a retirement plan loan. There are no legal restrictions placed on this type of a loan and the employers have the right to provide them or decline them to their employees. Amount of money that can be dispersed to the person as a loan amount is also controlled by the lender. Certain organizations might be forced to disperse retirement plan loans as per their norms and regulations.

There are restrictions framed based on the amount of loan that can be dispersed under retirement plan loan programs such as 401(k) loans. Borrowers can obtain an unsecured personal loans amount of either $50,000 or 50% of the retirement account balance. Borrowers would be able to receive only the loan amount whichever comes lesser in the above mentioned criteria.

Those who have obtained a loan in the past one year or so would also find certain restrictions placed ideally for them. They would be subjected to obtaining loan amounts only based on the amount calculated by the lender who is going to sanction the loan. The amount calculated in such a scenario would be based on the amount obtained in the latest loan obtained by the person.