Editors' pick: Originally published Oct. 24.
We all know good things come to those who wait — but not all of us can wait for some of our retirement savings.
In fact, one in ten workers have taken out "hardship" withdrawals from their retirement accounts, while 13% said they have at least borrowed from retirement savings — according to new numbers from the FINRA Investor Education Foundation.
But is taking out an "early withdrawal" always a bad thing?
"For the most part, you should avoid tapping into your 401(k) to cover your financial needs, to the extent you can," said Eric Meermann, a certified financial planner with Palisades Hudson Financial Group. "The most powerful asset that 401(k) plans can provide is compound growth, and time. Reducing the balance in the plan by a withdrawal or loan leaves less invested to take advantage of that compound growth over time."
"This will hamper your readiness for retirement," he added.
That does not mean, however, it is always wrong to take a loan from such an account, Meermann said. For instance, right now housing prices are still fairly reasonable, and interest rates are at historic lows — so if you are currently in the market for a house, but can't get quite enough money together for a down payment, it can make sense to get you into the house now at a lower price and lock in a low interest rate.
"This is opposed to taking the additional few years it may take to get the money together for the down payment otherwise, risking higher home prices and higher interest rates," Meermann said.
Meermann said another situation where it can make sense to use some of the 401k would be high-interest credit card debt.
"If you can't seem to get out from under that debt, it can make more sense to take a loan from the 401(k), pay down the balance, and then pay yourself back to the 401(k)," he said. "This way, the interest amount is getting paid to you, rather than to the bank."
He adds most plans have rules as to required payback — with most loans being for five years, although for the purchase of a home loan could be extended to 15 years.
Howard Dvorkin, chairman of Debt.com, however, said it's important to remember the compound growth downside to taking money out early.
"Plenty of people have told me, 'What's the big deal about borrowing from my 401(k)? The rules say I pay myself back with no penalty, so what's the problem?'" Dvorkin said. "The problem is, there is a penalty - not from an outside source but from you. That money you took out of your account is no longer accruing interest tax free. You're penalizing your future, not your present."
Dvorkin adds people should replace that money as soon as possible because the interest tghey are earning there likely eclipses anything else they are earning.
Neverthless, there are certain benefits to borrowing from a 401(k) as compared to other forms of borrowing, said Stephen Taylor, a certified financial planner with Professional Wealth Counsel in Miami, who has advised clients to take such loans.
"When you borrow from your 401(k), you are acting as your own bank," Taylor said. "The interest charged on the loan is paid back to your own account and not a third party. Typically when you need to borrow, you can't continue to make contributions so this interest to yourself can be looked at as additional savings."
If it's for an investment opportunity, starting your own business or maybe to purchase or improve a home, it can be a very good use of the money, Taylor continues.
"Banks are being more and more difficult in lending for these types of expenses and your options may be limited," he said. "We all know the true cost of borrowing from family and friends. If you have been disciplined and put the money in the 401(k) and you need it to take a step forward in your life, you should feel very comfortable in borrowing those funds."
However, Taylor adds if you are borrowing to make up for overextending yourself on daily living expenses, then the issue is really your ability to live within your means and the tough choices needed to be made there.
"I've heard certain advisors who speak adamantly against 401(k) loans say, 'You can't borrow a retirement,' to explain their belief," Taylor said. "I encourage my clients to pursue their dreams to reach their happiness and if this loan can help them down that road, they should believe that they'll be able to pay it back tenfold and achieve the retirement of their dreams."