Pros and Cons of borrowing from your nest egg

Many people end up in a financial crunch at one point or another in their life. We asked Steven Moore a financial consult who writes for a variety of finance websites. if you can borrow from your nest egg, such as your 401(k), an IRA, or other investments such as stocks, CDs or bonds. The simple answer is yes, and in the case of loans made against your stocks or bonds, these loans are known as margin loans. Any loans against your nest egg(s) will have several things to consider and take into account before you decide if it is worth borrowing against.

The plus side to borrowing from your nest eggs is that in most cases the interest rates are very low, and sometimes even interest free. One example is when you borrow from your IRA, you can borrow funds from your IRA interest free for a total of 60 days, but on day 60, or sooner, you must repay the money or roll the money over into another IRA account. You should never ever borrow from your IRA unless you are 100 percent certain that you can pay it back in full within 60 days. Failure to do this will result in taxes and a hefty penalty rate on your funds. I should point out however that there are exceptions to this penalty rule, such as if you are borrowing the funds to pay for college for yourself, spouse or child, or if you are using the funds for medical expenses that exceed 10% of your adjusted gross income, among other exceptions. Another exception to this rule is if you have been unemployed for 3 months or longer and have not had health insurance during this time. You can also borrow up to $10,000 for your first primary home and avoid this penalty. You also will not be benefiting from the interest rate on your IRA while you have withdrawn the money, since the money will not be in your account to garner interest.

Other nest eggs can be a poor choice to borrow against, such as borrowing from your 401(k) since when you borrow from a 401(k) you have to pay taxes if you have not made a payment within 90 days on the money borrowed. Also if you are under the age of 59½ you will have to pay a 10% penalty. Interest payments are not tax deductible like they would be for a home equity loan for example, so this is also a part of the cost of the loan. If you do not repay the money borrowed from the 410(k) then you are sabotaging all the hard work you have put into building up your retirement account, and potentially ruining your golden years. On the plus side you owe the money back to yourself instead of a bank. You can borrow up to 50% of your 401(k) balance, up to a maximum of $50,000. You have only 5 years however to pay this money back, unless you are using the funds to make a down payment on a new home. The interest rates tend to be much lower than any bank loan or personal loan may be. Since there is never a credit check to borrow this money, it is often an attractive loan option for those who are experiencing credit problems or those whose credit score has taken a temporary dive.

If you are thinking about borrowing from your 401(k) or your IRA, you should take awhile to think it over. It can become habit forming to borrow against these funds, and the cost can be dear if you should somehow not be able to pay back this money. Failure to repay these funds can hurt your retirement. Retirement funds should be hands off unless you are nearly 100 percent certain that you can repay it back in full. Loans against your retirement funds can make sense if you are borrowing against them for short term and can repay it quickly, but if you are borrowing for long term problems, then this loan option might not be the best option for you.