Unplanned expenses happen to everyone. And when you’re in a pinch, tapping into retirement accounts can be a tempting option. Yet securing fast cash does not have to divert your long-term savings plan—especially when there are other options out there. You’ve probably heard this before, but keeping your retirement intact is one of the best practices of personal finance. Here are five reasons why choosing a personal loan over cashing out your retirement savings can be the better choice for short-term capital needs.
Why Choose a Personal Loan Over Pulling from your Retirement?
You’ll Skip the Penalties and Taxes
For many kinds of retirement accounts, (including 401(k)s, IRAs, and Roth IRAs) the 59½ rule is hard to ignore. If you’re younger than 59½, you’ll most likely have to pay 10% on a withdrawal from your accounts.
You Won’t Miss Out on Earning More
One of the biggest advantages of retirement accounts is compounding interest. If you take money out of one of these accounts, you can lose any interest you may have earned if that money was left untouched. Keeping that money in your accounts means keeping that interest compounding, at that growing value.
You’ll Save More in the End
IRAs have contribution limits, so even if you pull out, it can be difficult to replace that money. And depending on the payback terms of your 401(k), you’ll not only pass up some compounding interest, you’ll have missed out on any employer matching for those contributions.
None of that happens when you keep it all in place. While seeing that interest rate on a personal loan may feel like you’re paying more upfront, you may actually be saving more in the long term.
You Can Have Easier Job Flexibility
If you do borrow money from your 401(k), that loan still exists even if you wish to change employers. This means that for most people who take out a 401(k) loan, their only option is to stay with the same employer until after the loan is repaid. As long as you can pay back your what you’ve borrowed, personal loans don’t usually have those restrictions on their borrowers.
You’ll Avoid Forming a Habit
People that have borrowed from their 401(k) once, are more likely to borrow against it again, according to a Fidelity study of more than 180,000 borrowers. “They find it’s probably easier than going to the bank to get a loan, so it becomes a bad habit,” says Jeanne Thompson, Fidelity’s vice president of market insights.
You can avoid credit checks, application processes, underwriting and the approval period. The money is already yours, so you are guaranteed to have access to it. But because of all the penalties, fees and taxes, falling into the trap of considering your investment accounts “easy money” is costly in the long run.
Why a Personal Loan is the Better Option
While it may not seem immediately easier, a personal loan serves as the smarter option for fast cash when you need it. You will have to pay interest on the loan, but you won’t miss out on any earned interest from your retirement. The long-term financial impact will most likely be less damaging, and you may be able to borrow more than what you’ve invested.
While retirement savings is easily accessible funds that is your money—it’s money that you’re saving for later, so keep it there.
Instead, form a healthier habit that will help you keep the money you’ve put aside for retirement, and create new wealth opportunities for yourself right now. Though it may be more work to secure a personal loan, it can leave you in better financial health, while allowing you to stay on track to accomplish your retirement goals.
You have options. You can make it. Take advantage of what’s out there and choose what’s right for you.
This blog is for informational purposes only. Best Egg does not give or solicit official investment advice. For more information about retirement accounts visit IRS.gov. For interest calculators and other financial planning tools, visit Investor.gov.