Financial need may arise anytime, and if you don’t have immediate access to money, you have no option but to take a loan. One of the easiest sources to secure a loan is your retirement account (also called a qualified plan) at Empower Retirement. Ironically, you have to tap into an account, which will be the source of your income when you retire. However, it’s the only resort when you have no option left.
If Empower Retirement manages your retirement accounts (401(k), 403(b), or IRAs,) you can follow this procedure to take a loan from Empower Retirement. Besides learning the mechanism of availing a loan, you’ll gain some insights into retirement accounts.
Shall I take a loan from Empower Retirement?
If you are confused about whether you should borrow from your retirement account or consider other alternatives, you should consult a financial advisor at Empower Retirement. The advisor will gauge your situation before recommending a feasible course of action.
However, some of the factors that you must consider while availing a qualified plan loan from Empower Retirement are:
- A genuine need: For example, you want to wrap up high-interest credit card loans. You can take a loan from your retirement account if the interest rates are considerably low in comparison to the credit card interest rate.
- It’s financially viable: When you repay a qualified plan loan, the interest is credited to your plan account. So basically you are putting money into the retirement account, again. However, check out interest rates offered by other institutions on loans. If the rates are significantly low, you can take a loan from any institution because the financial burden will be less.
- It affects your savings/investment: Firstly, you lose the benefit of tax-deferred growth on your earnings that you availed as a loan. Secondly, the amount you repay is not eligible for tax deductions. You have to pay taxes on it. Thirdly, contributions to the plan may get suspended for a certain duration (both yours and employer-funded) if you take a loan.
What are the loan rules at Empower Retirement?
Qualified retirement plans have the discretion to disburse loans. However, it’s possible that the plan you are investing may not offer loans. Verify this with the employer or plan manager (Empower Retirement in this case) before participating in the plan or applying for the loan. Have a look at the loan rules at Empower Retirement.
1) A valid reason for availing loan
While availing loans from a qualified retirement plan, you must convey your purpose. Some plans give loans for almost all purposes, while some provide only when there is a dire need. In most of the urgent cases – like inability to pay house mortgage, a medical emergency, or higher studies expense – you get the loan approval easily.
Some plans don’t ask you to disclose reasons at all. However, the paperwork is intense. You can get in touch with the plan manager at Empower Retirement to know more about the loan purposes.
2) The maximum loan amount
There are restrictions on the loan amount you can avail from a qualified plan. You can avail up to $50,000 or 50 percent of the vested balance (the money you’ll get from the plan), whichever is less. So let’s say your account balance is $120,000, and the vested balance is $80,000. You are eligible to get a $40,000 loan (50 percent of the vested balance), which is lesser than $50,000.
However, if the account balance is less than $20,000, you may borrow up to $10,000, provided the vested balance is at least $10,000. Let’s say your account balance is $16,000, and you are 100 percent vested. You can avail a $10,000 loan (the vested amount is more than $10,000).
3) Repayment guidelines to follow
The maximum tenure of repayment for qualified plan loans is five years. However, if you availed a loan for purchasing/constructing a primary residence, you can get more time to repay it. If you are unable to repay it within the tenure, it’s deemed as a taxable distribution. You’ve to pay income tax on it. And if you are under 59.5 years, you’ll pay early withdrawal penalty as well. However, if you can repay the amount within 60 days of defaulting, you can make a rollover contribution to a qualified retirement plan.
When you leave a job, or the employer terminates you, you may have to repay the full amount. However, you can repay the complete amount before the due date of your federal income tax return, including filing extensions.
What’s the repayment schedule at Empower Retirement?
While repaying loan taken from Empower Retirement, you can repay the loan in equated quarterly installments, i.e., you have to make repayments every quarter. An amortization schedule will be prepared that’ll list total payment, principal, interest, and loan balance. It may include other necessary information as well.
There are cases where the repayment is suspended for a specific period. For example, if your employer sends you on leave of absence and reduces your pay such that you are not able to repay the loan, the employer may suspend repayment for a specific duration, say for a year. However, this doesn’t grant a repayment extension to you. When you resume payments, the total payment amount will increase to pay back the loan within the tenure.
In some instances, the repayment extension is available. Suppose you are in the armed forces, and you got a call for duty. In this case, you’ll get a repayment extension. Your total payment amount will not increase once you resume back repayments.
Can I take a loan from IRAs?
As per IRS Publication 590, you cannot take loans from Individual Retirement Accounts (IRAs). You may hold either a Traditional IRA or a Roth IRA at Empower Retirement. You can only avail the distribution once you are eligible to withdraw money.
However, if you wish to withdraw money before maturity, it’ll be deemed as a distribution. It will attract income tax (in the case of traditional IRA, not Roth IRA) and may attract an early withdrawal penalty (for both IRAs).
The Bottom Line
If you’ve decided to apply for a loan at Empower Retirement, the financial advisors and plan administrators can help you with the proceedings. However, it’s advised not to avail loans from retirement accounts if not too urgent. In case you want to proceed anyway, check out potential costs associated with taking a loan using the Empower Retirement calculator.
Once you have made up your mind, contact your plan administrator to proceed ahead with the course of action.