How
much of my total retirement account can I borrow?
If
your employer allows you to borrow from your retirement
plan, the maximum loan is half of the value of the account.
Federal law will limit the amount to the lesser of $50,000
or 50% of the vested balance. Say you have $80,000 in
your retirement plan. You could borrow up to 50% of
the value of the account, which means you could get
up to $40,000. However, if your retirement plan is worth
$100,000 or more, federal law would prohibit you from
borrowing more than $50,000 -- even if your account
is worth millions. Some plans impose even lower limits;
the plan document may limit the maximum amount for loans
and restrict the availability of loans. [Top]
What
will a loan from my retirement plan cost me?
When
you borrow money from a retirement plan, the Internal
Revenue Service requires that you charge yourself a
"market rate" for the loan. The market rate
is considered the rate you'd pay if you got the loan
from a bank instead. Usually, the market rate is one
or two percentage points above the prime rate. So, if
the prime rate is 7%, the rate on your retirement loan
should be 8% or 9%. There is a loan-processing and administrative
fee of $100 dollars. But borrowing from your retirement
is still much better than borrowing from a bank, because
you're paying the interest to yourself. Essentially,
the loan becomes a fixed-rate investment in your own
retirement. When you retire, you'll get all the money
back, but the interest you pay on the loan with after-tax
dollars will be taxed a second time when you withdraw
it. [Top]
How
soon do I have to repay a loan from my retirement?
If
your retirement plan permits loans, you will have to
repay the loan through a series of regular payments.
More than likely, your employer will automatically deduct
the payments from your regular paycheck -- much as they
automatically deduct your retirement contributions.
The entire amount you borrowed must be repaid within
five years with one exception: if you took a loan to
buy a principal residence, the law says that it must
be repaid in a 'reasonable' period of time. Most plans
give you up to 25 years to pay it back, but the term
of the loan can't extend beyond your normal retirement
date, as defined by the plan. The catch is that if you
leave your employer, whether voluntarily or involuntarily,
you will probably have to pay all the money back in
a lump sum within 60 days. [Top]
Is
the interest I pay on a retirement loan tax-deductible
if I use the money to buy a house?
If
you are planning to borrow from your retirement and use
the proceeds to buy a home, it's important to remember
that the interest you pay on the loan from the account
will not be tax-deductible, unless the house itself
is used as collateral for the loan. [Top] |
