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You may be tempted to turn to your retirement funds for emergency cash. In fact, a new Bankrate survey found that 19 percent of Americans—including 17 percent of full-time workers—have taken money from their retirement savings in the last year to cover urgent financial needs. The survey was part of Bankrate’s Financial Security Index.

Options include withdrawing funds from an IRA, 401(k) or 403(b), for example, or borrowing against a qualified retirement account. (You cannot borrow against an IRA or pledge the assets for collateral as a loan.)

According to the Bankrate survey, roughly one in four of the unemployed and those earning less than $50,000 tapped retirement savings. These workers may be the ones least able to afford raiding their retirements.

[Related Article: Retirement Planning Lingo — 401k’s, Pensions, & Other Terms To Know]

Here are five questions to ask yourself before tapping retirement funds for emergencies:

1. How much will I really get?

On early withdrawals you’ll generally pay taxes and a 10% penalty. Depending on your tax rate, and the type of account, $10,000 withdrawn from your IRA, for example, could mean as little as $5500 available for you to spend. A tax professional can help you understand the true cost of cashing in retirement funds early.

2. Can I afford the payments?

If you borrow against your retirement account rather than draw money from it directly, you will typically have to pay back the balance, plus interest, over five years. Those monthly payments are likely to be substantially higher than, say, the minimum payment on a similar amount borrowed with a credit card. If you can’t afford to make the payments, you have to treat that amount as an early withdrawal—and pay taxes and penalties. In some cases, you may be forced to repay the remaining loan balance immediately if you leave or lose your job.

3. Will it really make a difference?

Using your retirement savings to pay living expenses or make payments on other loans (like credit cards, or even a mortgage) may simply amount to throwing good money after bad. If you experience financial problems after that money has been spent, for example, you may find yourself contemplating bankruptcy—a tactic you possibly could have taken before having depleted your retirement account. Since such accounts are usually safe from creditors in bankruptcy, you could wind up losing money that would have otherwise been protected.

4. What alternatives do I have?

Although you may feel the heat if you are at risk of falling behind on bills, take the time to look into other alternatives before using your retirement savings. Talk with a credit counselor and/or a bankruptcy attorney. Listen carefully to their feedback. After all, they’ve helped many other people with problems similar to yours, and they can help you make a better decision.

5. Am I on track with my retirement savings?

If you have ample money socked away for the day you’re no longer in the workforce, this may not be a big deal. But if you’re already behind, as many workers are, then using those funds early will only make it harder for you to retire someday.

Image: Bankrate.com

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  • rm handel

    As a professional in this field, I think this article fails to mention a few critical points. Frist of all, the interst on a loan fro your 401(k) is paid back to YOURSELF, into your account, not a bank or a credit card company. Secondly, your financial institution managing your 401(k) is the best resource to see what you have available, not your financial planner, becasue of your employer sponsored plan rules. Lastly, you may still have options for loan repayment even after separation from your company, and tax implications can be minimized through a rollover of funds if the loan is turned into a withdrawal. I hope readers are not confused by the misleading statements in this article!

    • http://www.credit.com Gerri

      Thanks for weighing in. Your point that when you borrow you are paying interest to yourself is correct; however, I would add that you are paying yourself with after tax dollars and you are keeping that money from earning investment returns for that period of time – which could be good or bad depending on how the market does!

      However I am confused by your a couple of your points. I didn’t mention going to a financial planner. I suggested that those who are thinking of cashing in (not borrowing against) a retirement account talk with a tax professional to find out the tax implications of an early withdrawal. In my opinion that’s advice only a tax professional can give – not an HR person or plan administrator.

      I also mentioned that someone who cannot make the payments or is separated from their job and must repay the loan immediately may wind up forced into an early withdrawal. How would they do a rollover without the funds to repay the loan? Perhaps I am missing something.

      I am not opposed to loans against retirement accounts. I have written about the pros and cons in other stories. My concern here is for the many people mentioned in this study who took these loans to meet urgent financial needs, and could wind up creating even more financial problems for themselves. Is that somehow misleading?

      • Cindy

        Gerri, You mentioned that you are paying the loan back with ‘after tax dollars’. I have heard other planners say this also. I don’t understand why this is a concern since you didn’t pay tax on the money that was borrowed. Aren’t you just putting the borrowed money back in you account?

        • http://www.credit.com Gerri

          Great question Cindy. Presumably you’ve already used the money you borrowed to pay bills or for whatever purpose you took out the loan. Then you’ll pay it back from income you are now earning. As long as you earn enough income that you are required to pay taxes on your income, then you’ll have to first pay taxes on that income, then use what’s left to pay back this loan.

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