This week, we’re excited to introduce Benefits U, a new program from Human Resources aimed at educating North Shore Bank employees about — you guessed it — your benefits. Look for Benefits U articles, webinars, seminars, and more on the way, all marked with the handy Seymour logo seen here. We’re kicking things off today with a look at 401k loans, and whether taking one out is a good idea for you.

By Cindy Lohrey, AVP, Payroll & Benefits Manager

If you’re in a pinch and need money, you may be thinking about a 401k loan. Borrowing money from your retirement savings can seem like an attractive idea when you need it now. But while it is your money, you should consider a few things before tapping into your retirement account.

It’s a loan
Borrowing from your 401k is just like taking out an auto or home loan — you have to pay it back with interest. It’s not free money.

Interest and fees
The 401k loan plan charges you a loan origination fee of $50. In other words, if you’re borrowing $1,000, then with the $50 fee, you are losing 5 percent right off the top. Plus, in addition to that and any other fees, you also have to pay interest. The interest rate for a 401k loan is currently prime plus 2 percent.

Taxes
If you are contributing to your 401k with pre-tax contributions (not Roth), you get a tax break when making contributions to the plan. Then, you are taxed in the future when you take the money out of the plan. When you take a loan from your plan, you may be exposing yourself to additional taxes.

While the regular contributions (again, not Roth) are taken pre-tax from your paycheck, loan repayments are not. This means you are taking pre-tax money out of your account and repaying it with after-tax money.

Loss of compounding interest
Over time, the interest and gains on the money in your 401k account can accumulate significantly — that is, it compounds. When you take money from your 401k for a loan, you are reducing the amount that compounds and your money doesn’t grow as fast.

If you leave the company…
If you leave North Shore Bank and have not completely paid back your loan, that loan defaults and is treated as a distribution, which would be subject to taxes and an additional 10 percent early-withdrawal penalty.

We know life happens and sometimes there is a real need for extra money. But before taking out a 401k loan, consider all your other options first and understand what borrowing from your retirement plan will really cost you. For more information, you can speak with an Empower Retirement representative at 800-338-4015.