Tuesday, March 05, 2019

By Barbara Pronin Books and countless articles have been written to underscore the folly of tapping into retirement savings. Withdrawing funds from a tax advantaged IRA or (401)k could trigger hefty taxes and penalties if you can’t repay them in a timely fashion, and saving money via these tax-advantaged plans may be the very best chance you have to safeguard the security of your senior years.

But into each life occasionally fall dire emergencies - medical or funeral expenses, impending foreclosure, or a handful of similar hardships - and in such cases, the IRS may sanction a ‘hardship withdrawal.’

Without question, you risk retirement security if you take out the money and don’t repay it. But, point out the money experts at The Motley Fool, if you need funds to cover a true emergency, there are three reasons to consider a hardship withdrawal instead of taking out a personal loan:

The loan process is simple - Assuming your plan allows for a (401)k loan, the process is generally easy. You don’t need to undergo a credit check. You just talk to your plan administrator to find out the rules, and fill out some paperwork - perhaps even online - and you get your money fairly quickly.

The interest rate will be low - While interest rates vary from plan to plan, they are typically lower than the rates on personal loans, which means more of your money is going toward principal and the monthly payments will be more affordable.

You’re paying interest to yourself - Not only is the interest on a (401) k lower, but tapping into retirement savings means you’re paying the interest to yourself. You are basically contributing toward your retirement account, where the money can be invested for the future.

Unless you really need the money, financial professionals maintain - and you will be serious about paying it back - you should not tap into retirement savings. But if you are in real and immediate need, the easy qualifying requirements and lower interest rates involved can make a hardship loan against your (401) k a reasonable, if cautious, option.

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