Your Employer-Sponsored Retirement Plan
Can Your Retirement Savings Help You During Challenging Economic Times?
The roller coaster ride of the financial market continues its downward decent making the term “financial struggle” something everyone can empathize with. With the current economy at an extreme low and unemployment rates at an extreme high, you may be wondering where you can find an alternative source of money.
If you are experiencing a financial crisis or being hit with unexpected expenses, you may be exploring options through your employer- sponsored retirement plan. Should you stop contributing to your retirement savings in order to use that money elsewhere? Are the loan or hardship withdrawal options your plan provides tempting opportunities? These choices may be right for you if you are facing an unavoidable and urgent situation. Since these choices could have a significant impact on your future financial goals, any change to your retirement saving strategy is a very personal decision that should be considered only after weighing all of the benefits and disadvantages.
Should I stop contributing until the economy revitalizes?
During difficult economic periods companies may reduce or even eliminate matching contributions to their employees’ plans. Does this mean you should suspend your contributions also? Most financial professionals would encourage you to stick to your long-term investment plan and continue to contribute. The longer you cease contributions, the more you are sacrificing any potential financial growth. You would also lose the advantage of tax-deferred compounding on the money you would have been contributing.
A loan would really help me now – but what about later?
Many employer-sponsored retirement plans allow you to take a loan against the balance of your account. Sometimes needing quick access to money is unavoidable, but is your situation really worth the long-term effect it may have on your financial goals? Before you decide to take advantage of this option, there are a few considerations to take into account.
There are some benefits to taking a loan from your own savings. The simple process, instant approval and competitive interest rates alone make the option very attractive. However with the pros, there are always cons to consider.
- Most loans must be paid back within five years
- Although you do not pay income taxes on the loan amount, you do pay interest and possibly processing and other fees
- If you leave your job for any reason, you must pay back the loan immediately or the amount becomes a taxable withdrawal
- Some plans offer easy automatic payroll deduction to repay, however this reduces your take home pay
Borrowing from your plan also means that you’ve lost the opportunity for tax-deferred compounding on the loan amount. Additionally, taking a loan from your pre-tax savings and repaying from after-tax earnings means you pay taxes twice – once when repaying and again when you withdraw money in retirement.
Most plans include these general guidelines, however please check with your plan for any specific rules.
Do hard times mean a hardship withdrawal is a good idea?
A hardship withdrawal may be difficult to obtain, you must meet certain federal guidelines, and it can be costly if you do receive it. Also, employers are not required to offer this option, so you should check to see if it is available to you.
There are generally a limited number of qualifying situations:
- Un-reimbursed medical expenses for you or your dependents
- Purchase or repair (due to a casualty loss) of a primary residence
- College tuition
- Preventing eviction or foreclosure of your primary residence
- Funeral expenses
There is a 10% IRS early withdrawal penalty if you are younger than 59unless you meet specific criteria. These qualifiers include (but are not limited to): Disability, medical expense debt, court ordered payments, or separation from service at age 55 or later (if you have previously scheduled withdrawals).
Hardship withdrawals must be limited to the amount of money you need, and must be taken after you have exhausted all other distribution options or non-taxable loans otherwise available to you. You will also be prohibited from contributing to your plan for six months.
While we understand that exercising these options may be unavoidable, it is important to be aware of the real cost to you.
Retirement plan loan
Below is the estimated cost of taking a $10,000 loan from your plan for five years with a 6% interest rate.
Original loan amount
Interest paid with after tax dollars
Repaid loan amount with interest
Additional taxes paid when the money is withdrawn at retirement
Total cost of loan
*This illustration is hypothetical and for demonstration purposes only. Assume a 28% federal tax bracket at retirement.
Below is an example of a $10,000 hardship withdrawal for college tuition.
20% voluntary tax withholding
10% early withdrawal penalty
Total for tuition
A change in investment strategy or a withdrawal taken in haste today could have a substantial effect on your future. Be sure to understand and consider all aspects of the choices available to you before selecting the right solution for your situation.
Insurance products, annuities and funding agreements issued by ING Life Insurance and Annuity Company ("ILIAC"), One Orange Way, Windsor, CT 06095, or annuity products are issued by ReliaStar Life Insurance Company, each of which is solely responsible for meeting its obligations. Plan administrative services provided by ILIAC or ING Institutional Plan Services, LLC. All companies are members of the ING U.S. family of companies. Securities distributed by or offered through ING Financial Advisers, LLC (member SIPC) or other broker-dealers with which it has a selling agreement. Only ILIAC is admitted and its products offered in the State of New York.
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