Wednesday, May 13, 2009

WWYD Wedensday: Retirement Investments vs. Debt

In light of most people who had significant investments for retirement losing a good portion of them this year, I thought this would be a good topic to discuss this week.

I read a short article at Comcast Finance about borrowing from your 401k or 403b to pay off debt. I once did this since it was considered a hardship and I lost the job where I was contributing to it I didn't have to pay it back. However it didn't come without steep tax penalties and I only took about something to the tune of $1200 at the time.

Currently, I have no retirement investments (yes, I know I need to). So it really isn't an option for me but it is for many out there who may have enough left after losing portions of it during the credit crisis etc...

But should you? Should you borrow against your retirement to pay off debt? Should you borrow from your future to save the present?

Personally, I say no, at least not in most situations.

What do you think? Would you borrow from your retirement if you were in hot water financially? How much is too much borrowing if you would use retirement to do so? What would be the circumstances you would borrow from retirement?


  1. I cashed out a plan once as well, but that was before i knew that you could roll a 401K from a n old job into an IRA. I got hit with penalties and taxes - so not worth it!

  2. I borrowed against or from my 401K three times, once to fund the downpayment on my house (and paid back about 2/3rds of that by the time I left that job), once right before the BK to try and stop the debt craziness (in hindsight-did nor work at all,I just managed to catch up and pay off a few of the many bills I had at the time) and I had to borrow $1000 to replace my transmission that blew up on my car on my way back from my Trustees meeting.

    I borrowed against the 401 for my house since I was still employeed and contributing the max to my 401K at the time, I'd do the same again IF I was secure in knowing I'd still have a job with the company and could payback the 401K in a timely fashion.

    At this point in my life I consider my Roth IRA(the old 401k) off limits unless it was a serious medical emergency situation that gravely impacted my health.

  3. Kari, I can say that I am one of the rare people in the US that has NOT lost one penny of retirement income in these economic times. Before you gasp in excitement, let me hasten to add that I have NO money in any retirement funds and that is a horrible, horrible place to be at my age. Do the best you can to save something, even a little bit, and try not to have to touch it. One day you will be so glad that you did.

  4. Hi Kari,

    I've cashed out my RRSPs before for stuff like this and now regret it. I would NOT do it again. It's not worth it, even with the current state of the economy. The only reasons I would cash it out would be a) house downpayment or b) schooling. Either way there is no penalty, but you do have to pay it all back (I think it's within 10 years) plus pay some serious catch-up. I agree with Immer, though: don't put off saving! Start now, save whatever you can. It will be worth it.

  5. Dawn, both of the 401's I carried at different times had too little in them to roll over to an IRA. I knew you could but the only options I could find were for amounts higher than I had to roll over. So upon the jobs ending I cashed them out (with the fees and high taxes you mentioned as well).

    Bouncing Back, don't you wish we had some of that insight sooner rather than later? Part of school I think should include financial planning for REAL life. I would be in an entirely different situation had I known half of what I know now. Well not entirely but significantly different/better.

    Immer, I'm one of the rare too. I'm sorry you are as well some of that money rather than none of it probably looks way better to you in this position.

    Northern, it seems like you and I agree, should I need it for schooling or a downpayment on a home I would borrow against my 401K (if I had one) at my age it wouldn't make a huge dent in my retirement future if I did.

    I hope to enroll in the 401K after my bankruptcy is discharged. At this point I'm in a financial limbo until I pay the attorney fees and then court costs etc... I can't do anything new or it can affect the bankruptcy I believe. I'm not entirely sure. At any rate right now we are not at an enrollment period at work.