Considering a loan from the
Local 30 Annuity Funds on January 2, 2004? As tempting
as that may be when you need money, don't dip in until you
consider the following:
The more you borrow, the
less money you have to potentially grow for your
retirement. Leave your money untouched and you
could be looking at a better retirement lifestyle or an
earlier retirement.
If you leave your
contributing employer you still need to pay the outstanding
balance, within a specified time period. If you
don't the outstanding amount will be considered a
distribution, which will subject you to ordinary income
taxes, and possibly a 10% early withdrawal penalty if you're
less than age 59 1/2.
You pay for the
privilege of a loan with an initial fee of $35 and $3.50 per
month - without some of the benefits. If your loan
from your plan account is for a home, the fees may be lower
than mortgage costs. But you won't be able to
refinance if rates drop, and you can't take a mortgage
interest deduction on your income tax.
Your loan money misses
out on growth opportunities in a rising market. You
will want your money invested when the stock market is
rising. But if you take out any of your retirement
savings account money for a loan, that money is not invested
and, therefore, is missing an opportunity for growth.
As for growth opportunities, consider this: In the 10-year
period ended June 30, 2001, the average annual return for
the Standard & Poor's 500 Index (S&P 500® Index)
was 15.10%. For the same period Lehman Brothers
Aggregate Bond Index, a measure of more than 6,000
government and corporate bonds, and mortgage-backed
securities, returned 7.87%. These returns indicate
that, for those who kept their money invested over the long
term, there were many opportunities for growth in the stock
and bond markets. Of course, past performance is
no guarantee of future results.
If you default on your
loan, the IRS considers the outstanding balance a
distribution. The distribution will be subject to
ordinary income taxes, and possibly a 10% early withdrawal
penalty if you're younger than age 59 1/2. You will
also never be able to take out another loan.
It may be better to
borrow elsewhere. If you have the equity to use as
collateral a home equity loan may be a better deal than
borrowing from your retirement plan. This type of loan
may offer lower rates than an unsecured loan, and your
interest is tax deductible.
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