A financial planning lawyer at Nirenstein, Horowitz & Associates can provide you with help in understanding your options for saving for retirement. We assist you with setting goals so you can save enough to achieve financial security during your golden years. We also help you to take steps to understand the different tax-advantaged retirement accounts that can make it possible for you to put aside money for your future while getting generous tax breaks that make saving much simpler.
When you have started the retirement planning process and have begun investing in a retirement plan, you may find yourself tempted to tap into the retirement savings that you have if you experience a financial shortfall. However, this is typically a really bad idea that can have profound long-term and short-term financial consequences.
The CT Post recently published a comprehensive article explaining why it is a very bad idea to borrow against a retirement plan. A Connecticut financial planning lawyer at Nirenstein, Horowitz & Associates can also offer you personalized advice about the big downsides that could result if you borrow against your plan.
Why Borrowing Against a Retirement Plan is a Bad Idea
As the CT Post explains, it is sometimes possible to take a 401(k) loan and borrow money that you have saved for retirement without incurring immediate tax penalties. If you simply withdraw money from your 401(k) before you reach retirement age, rather than taking out a loan, you will end up owing a big tax penalty because of the special tax rules associated with this type of account. However, loans allow you to get around the tax hit that comes from early withdrawals. This does not, however, mean that it is a good idea to borrow from your 401(k) or that borrowing against your retirement account is something that you should do.
Most experts believe that it is a very bad idea to borrow against a retirement plan, the CT Post indicates. In fact, a Chief Financial Analyst at Bankrate told the CT Post that borrowing against a retirement account is a “permanent setback to your retirement planning.” There are a few big reasons why borrowing against a 401(k) can be such a bad idea.
One of the big problems is that when you borrow against this account, you lose the chance to earn investment returns during the time that your money is not in the account working for you. Compound interest can make it much easier for you to meet your retirement goals, but you benefit from compound interest only if the money is actually in your account and the returns you’re earning are compounding. If you’ve borrowed the money, then it isn’t invested.
Another problem is, when you take money out, you’re now spending time putting money back into the account instead of investing new money. Since you likely have finite funds, repaying the loan may prevent you from putting new money into the account that you need to invest to have a more secure retirement future.
As you repay the loan that you took out of the 401(k) account, you’re also repaying the pre-tax funds that you had originally invested with after tax dollars. Not only does this make it harder to invest, but when you withdraw money at retirement, you’ll be taxed a second time on the repayment funds since the account doesn’t distinguish between the money you put in that was deducted from your taxes and the non-deductible funds that you paid back a 401(k) loan with.
Getting Help from A Financial Planning Lawyer
These are just a few of the many key reasons why you do not want to take a loan from your 401(k), even if you have money in this retirement account that you would prefer to use for other short-term money goals. Saving for your financial security as a senior is one of the single best things that you can do for yourself so you will have the peace of mind of knowing that you can retire without major financial worries.
Nirenstein, Horowitz & Associates can help you to understand the different kinds of tax-advantaged retirement accounts available to you and can help you to set goals for investing in these accounts so you can make it easier to save enough for retirement. To find out more about how we can help you, give us a call at 860-548-1000 or contact us online to today. You can also join us for a free seminar for information on a wide variety of legal issues related to retirement planning and financial planning. Give us a call or contact us about a seminar today to learn more.