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Before the housing crisis, it wasn’t uncommon for people to raid their home-equity piggybanks to pay off bills. Plummeting home values and tougher lending standards helped curb that practice, leading some people to engage in a far more disturbing habit: borrowing or withdrawing money from their retirement accounts to cope with financial hardship.
There may be times when a loan or withdrawal from an IRA or 401(k) plan is your best or only option, but you should be aware of the possible impacts to your taxes and long-term savings objectives before raiding your nest egg.
401(k) loans: Many 401(k) plans let participants borrow from their account to buy a home, pay education or medical expenses, or prevent eviction or mortgage default. Generally, you may be allowed to borrow up to half your vested balance up to a maximum of $50,000 – or less if you have other outstanding 401(k) loans.
Loans usually must be repaid within five years, although the deadline may be extended if it’s used to purchase your primary residence.
Potential drawbacks to 401(k) loans include: If you leave your job, even involuntarily, you must pay off the loan immediately, usually within 30 to 90 days, or you’ll owe income tax on the remainder – as well as a 10 percent early distribution penalty if you’re under age 59.
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