Borrowing Against Your Retirement: More Costly Than You Think!

Participating in the company’s retirement plan is a smart and important decision! Smart because you are putting away small amounts today for a comfortable retirement later.

As your account begins to grow, it may be tempting to “dip into” your retirement savings by taking a loan against your retirement plan to pay your annual taxes, repair a leaking roof, catch up your everyday pile of bills, and so on. While the decision to take a plan loan is yours to make, we want to make sure that you consider what it will really cost.

With a retirement plan loan, you pay yourself back the amount plus interest. But the true cost can be harder to see:

  • You are double-taxed on repayments: once when you repay the loan with after-tax dollars and again when you withdrawal money in retirement.
  • Your money is no longer invested, so you lose the opportunity for investment earnings and the compounding of those earnings.
  • There is (typically) an initial set-up and quarterly loan fee.
  • Most employees decrease or cease the amount they are contributing to compensate for the loan repayment.

To further illustrate the costliness of taking a plan loan, consider the following hypothetical example*:

Jane took a $10,000 loan at 7% interest from her retirement account; her account balance before the loan was $20,000. She previously made contributions of $150 per paycheck (including the employer match). Because she had to repay the loan, she decreased her future contributions to $50. Additionally, prior to the loan, she was earning a 10% return. She will repay the loan over five years.

If you consider loss of interest, compounding, and tax on repayments, the actual retirement plan loan is costing Jane 13.77%! And don’t forget about those decreased contributions, which can add up to hundreds of thousands of dollars over many years.

*This example is hypothetical and intended for illustrative purposes only.
Securities and investment advisory services are offered solely through registered representatives and investment advisor representatives of Ameritas Investment Corp. (AIC), a registered Broker/Dealer, Member FINRA/SIPC and a registered investment advisor. AIC is not affiliated with Summit Group of Virginia LLP. Additional products and services may be available through Summit Group of Virginia LLP that are not offered through AIC. Representatives of AIC do not provide tax or legal advice. Please consult your tax advisor or attorney regarding your situation.

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