Penalties, smaller paychecks and less money at retirement make it less appealing.
At GE Appliances, more than one in four employees borrow against their Fidelity My Savings Plans. We get it: a down payment on a house, paying for a wedding, buying a new car, and/or paying off student debt – you need the money.
However, retirement accounts are meant to stabilize the future. Borrowing from your plan can potentially wipe out all your retirement plans, and it may be risky. Consider these three things:
1. You won’t be fully invested while you have an outstanding loan balance
You’ll miss out on investment compounding. Long term, this can have an impact on the amount of money you have at retirement.
2. Your paychecks will be smaller
Due to payroll deductions, you’ll be spending more to repay the loan and dealing with a lower monthly income at the same time.
3. Tax penalty
When you borrow against your plan, you must pay federal and state taxes on the amount you withdraw plus a 10% penalty if under the age of 59 a half.
If you’re facing a financial emergency and don’t have the savings to cover it, you have options. Instead of using money from your Fidelity My Savings Plan, consider these three alternatives:
1. Personal loan
Personal loans often have lower interest rates than credit cards. You won’t have to deal with it being taxed as income or getting a giant penalty fee.
2. Home equity loan
Tapping into your home’s equity can be a way to avoid taking out of your Fidelity My Savings Plan loan. A home equity loan usually offers low interest rates and stable monthly payments, making them manageable while paying them back. Use these loans with caution. You run the risk of losing your home if you fail to make the payments.
3. Negotiate with your creditors
Consider negotiating a payment plan with your creditors. Contact your creditor yourself to initiate this process or hire a third-party source to negotiate a debt repayment plan for you.
Overall, the best way to avoid borrowing against your Fidelity My Savings Plan is to build emergency savings. Contact Fidelity at 1-800-835-5095 and talk to a financial expert about budgeting and savings.
Source: Fidelity & Bankrate