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Of course, that rate of interest is typically lower than the participant could earn in the retirement plan—and it has to be repaid on an after-tax basis, to boot.
This month's KnowHow introduces the concept of the trade-offs a participant should consider in taking a loan—hence, the notion of "borrowing from Peter to pay Paul."
Most participant-directed retirement programs today offer participants the ability to borrow against their accumulated savings for a variety of reasons, both significant and mundane. It has long—and perhaps rightly—been viewed as an important incentive in encouraging workers to participate in the program.
Still, taking money from the plan, however temporarily, runs counter to the basic premise of tax-deferred savings. Every day the money is not in the plan, the participant loses ground in saving for retirement.
We hope this month's issue will help you offer your participants an opportunity to balance their current need for cash with their need for cash in the future. —Nevin E. Adams, JD