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If you need money to cope with an unexpected expense, to pay down debt, or to afford a big expense such as a wedding or college tuition, taking a loan from your UTSaver Retirement Plan may seem like a good option. After all, retirement is years away for many people and it may feel like you have plenty of time to rebuild those savings.
However, taking a loan from your UTSaver plan today can hurt you in the long run, including possibly lowering your chances of retiring when you want to. Four in 10 Americans (44%) who borrowed from a retirement plan say they regret it, and another 23% don’t regret it but would not do it again, according to a recent TIAA-CREF survey.
The popular misconception that “you’re paying yourself back” when you repay a UTSaver plan loan overlooks the lost potential earnings during the payback period. For instance, a $10,000 loan paid back over five years could mean you are forgoing more than $3,500 in potential earnings. Also, many borrowers put less money into their retirement plan when they are paying back a loan: More than half (57%) of those who took a retirement loan cut their contribution rate while they paid back the loan.
UTSaver loans, like many other types of loans, may charge some loan origination fees. Also, even though you are borrowing from your own account, you still must repay the loan, which comes with risks. If you leave your job and have money due on the loan, you may have to pay off the loan within 60 days or declare the entire amount of the loan as a taxable distribution, depending on plan rules. Similarly, if you do not repay your workplace loan in a timely manner, you will be considered in default of the loan. Both scenarios can trigger tax payments and a 10% penalty on the entire amount borrowed, and under the UTSaver plans, if you ever default you will never be able to take another loan again.
Outside of retirement funds, you have a few options. Each option has pros and cons, but there are a few avenues to consider if you need to raise money for a significant or unexpected expense:
- Emergency fund
- Student loans (for education expenses)
- Home equity loan or line of credit
- Loan or withdrawal from life insurance policy
- Loan from the UTSaver plan
- A hardship from the UTSaver Plan (for qualified expenses only if a loan is not available)
- Withdrawal from Roth IRA
One of the best strategies is to build an emergency fund to cope with unexpected expenses in the future. Generally, you should have enough to cover at least three to six months of living expenses in the event of an emergency such as a job loss. Other uses for a fund can include medical expenses and car repairs. If you have no money set aside for emergencies, aim to set aside $500 or so as a start and build from there.
KNOW YOUR OPTIONS
It can be difficult to deal with life’s many expenses and demands for your money while also safeguarding your financial future. Fortunately as a UT employee you have qualified financial advisors from five of the strongest retirement providers in the country available to speak to you at any time. To learn more about the services available to you from the UTRetirement Providers, please visit our website at www.utretirement.utsystem.edu .
Information courtesy of TIAA-CREF. To read the full article, please visit https://www.tiaa-cref.org/public/advice-guidance/saving-for-retirement/borrow-from-retirement-plan?p=1331943740900 .
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To learn more about the UT Retirement Programs and to start or update your contributions, please visit our website at www.utretirement.utsystem.edu .
