A 401 K is a retirement plan that focuses on securing the future of employees. It is a plan that was introduced in the 80s and it has become a major alternative to the regular retirement plan offered by different firms. Money that is saved on the 401K account will not accrue any penalty until the person retires. It is usually tempting to many people, and some look at it a chance to borrow from the account and pay rent, fees or even buy a retirement home. The truth of the matter is that saving a down payment for the mortgage can be challenging. This tempts most people to begin house hunting with the money they have saved in their retirement plan.
It is understandable that the money in the retirement account is yours, and you can use in whichever way you like. However, there are certain financial traps that if you fall into it is very difficult to get out of it. The first reason you are borrowing from your retirement savings account means that you do not afford the house in the first place. You weigh options at hand and determine the financial repercussions. The decisions that you will make now can affect your future finances. Financial experts warn against borrowing money from your retirement account to pay for items or buy a retirement property. When you retire, the situation then will determine whether you need to buy retirement properties or rent one. Here are some of the other reasons why you should not pull your retirement savings to buy a house.
You Will Require the Savings In Future
401 K plan is different from the regular IRA withdrawals because you will have to pay back the money that you have taken. Repaying a loan taken especially with advancing age is a challenge that many people fail to circumvent. At times, it is good, to be honest with yourself, what happens if you lose the job in six months or even a year? The loan requires servicing, and you still have regular bills to pay, this will cause you to default the payment plan and ruin your financial future. Stretched budget forced to borrow from your retirement savings and it means that the money you earn currently is not sufficient to cater for an extra loan or bill. You will need the money in future when you retire. There are so many costs associated with house purchasing, from repair and maintenance, legal fees and property taxes among others.
You Will Compromise Your Future Financial Situation
The current state of affairs on the 401 K plan indicates that you can borrow up to 50% of the total balance in your account. If you borrow half of the money now and pay it an interest of 8% annually, the money borrowed would have grown four times in twenty years. Borrowing your retirement money right now will put your financial future in jeopardy because the money will reduce and it will not grow at the expected rates. Besides, you will not be able to keep up with the payment of the bills and loan. Reducing the future financial returns means that you will not be able to enjoy your retirement fully since the money in your account is already low. I would advise that you keep renting as an option currently as you wait for a better and enjoyable retirement in future.
Borrowing to Buy retirement property Accrues Penalties
In certain situations, the tax body considers the borrowing of the retirement savings as a means to counter a current situation that requires emergency financial need. However, this is only applicable to people who are six months to the legal retirement age. When you borrow from your retirement, account to buy a house, you will penalize 10% to the borrowed amount. The amount is now under a different category and is considered taxable income. Since the saving is pretax money, repaying the loan will include the taxes, and this will increase the amount that you will pay eventually.
Borrowing from the Retirement Plan Becomes a Habit
Borrowing from the retirement plan to buy retirement properties may seem a bright idea in the first place. However, you will soon be lazy since you know that you can borrow from the account whenever you are in any financial trouble. According to research done by banks, people who have borrowed their retirement savings stand a higher chance of borrowing from the same account than people who have not. If you are used to living beyond your means, it becomes a habit, and you will do this in the long term.
In conclusion, look at various aspects of your finances. The merits and demerits of the project you want to undertake before you run to borrow from your savings account.