How to Borrow Against Retirement Funds

Borrow against retirements only when absolutely necessary.

If you find yourself in need of money for an emergency or for a home purchase or home repair, you may find yourself in need of a loan. Many people take out home equity loans, also known as a second mortgage on their home. Others take personal loans with very high interest rates. There is, however, another option. You can borrow against your 401(k) retirement fund.

Instructions

1. Decide how much money you need. You don't want to borrow more money than you need. This is because loans against your retirement fund can slow down your investment growth. With some retirement plans, the money you have a loan against does not grow until you pay it back. There are some companies that even forbid more contributions if there is a loan against a retirement fund. This may seriously hinder your investment potential.

2. Consider other options. While the interest rate of a loan against your 401(k) is pretty low, about 5 percent to 6 percent, you may be able to find a source with a lower interest rate if your credit score is good. Pair that with the fact that your retirement fund may cease to grow, you may want to consider other options. Keep in mind that the interest charged on a 401(k) loan will go back into the account. It goes back into your account because you are, in essence borrowing from yourself. So there will still be some growth in your account but it may be considerably less than if you had never taken a loan. You must weigh the pros and cons of a 401(k) loan with other options.

3. Go to the human resources office of your job to apply for the loan. Your colleagues will have forms to fill out and it will take approximately 10 days to process your loan. There is not a long process or credit check required because it's your own money. Some retirement services offer online account management where account holders can view their 401(k) over the internet and even request a loan. Check to see if your plan provide this service. If they do you may be able to recieve your loan in as little as three days if you are willing to pay a small fee to expedite the mailing of the check.

4. Sign for your loan. If you have a spouse, your job (and the law) will require both you and your spouse to sign for the loan to make sure you're both aware you are taking a loan against the retirement fund. If you are taking the loan from your providers web-site, an electronic signature will be required.

5. Understand that your employer may offer you the opportunity to use a debit card to borrow against your 401(k). Just because it is easier to withdraw does not mean that it is not a loan and should not be taken seriously.

Tips & Warnings

• You can borrow up to half of your retirement funds or $50,000, whichever is smaller.

• The interest that you pay is paid back to your account so, there will be some amount of growth.

• The loan is repaid through payroll deductions.

• If you leave your job, you have to repay the amount of the loan within 60 days or the loan may revert to a withdrawal, which will, of course, come with penalties and fees.