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Borrowing and Withdrawing Retirement Funds, PART 2

When facing the choice of whether to take money from your retirement fund before you retire, wealth management experts urge Chula Vista residents to make sure that they know the penalties and consequences for their taxes and financial plan.

Previously, we looked at planning your eligibility for retirement fund loans and the various loan restrictions you should be aware of if you’re thinking about borrowing from your retirement fund. If you missed Part 1 of the series, click on the link: Financial Advisor Chula Vista, PART 1.

Let’s continue by looking at the tax implications…

Wealth Management Advice for Chula Vista: Tax implications

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As long as you repay the loan within the agreed-upon timeline, the amount you borrow is not considered taxable income. However, if you fail to repay the loan, the unpaid amount will be considered taxable income for the year you failed to repay it. In addition, this amount will be subject to a 10 percent early withdrawal tax, unless the reason you borrowed the money qualifies as an exception to this tax.

“Keep in mind that the interest you pay on the loan will be taxed twice,” warns a JKL Wealth Management expert in Chula Vista. “The money paid into the retirement plan was done so pre-tax (and your loan is not taxed), but the extra money you’ll pay in interest has already been taxed once, whenever you received it. This money will go into the retirement account and then be taxed again once withdrawn.”

Other Considerations for Chula Vista Residents When borrowing From a Retirement Plan

There are some inherent downsides to borrowing from your retirement plan. When you borrow money from your retirement account, you lose some of the value of compound savings in your account, as you are giving yourself less principal to build on. You may also find it hard to repay your loan and build up your retirement savings at the same time, so your overall contribution may go down. Borrowing money may also cause you to lose diversity within your retirement portfolio by reducing the amount of overall assets.

“If you find yourself in a position where you need a loan to pay for a necessity, you should first compare loan options from other financial institutions, and then make your decision based on what makes the most financial sense,” explains JKL Wealth Management expert, John Lohrenz. “And, if you decide to borrow from your retirement account, you should try to continue to make contributions to your account while paying off your loan, if you are able to do so.”

Wealth Management Advice for Chula Vista: Hardship Distributions

Unlike a loan, a hardship distribution is when you remove a part of your retirement savings without the intent to pay it back. The amount you withdraw will permanently reduce your retirement account balance, and you may be required to prove that this withdrawal is for a financial need and that you have no other way to pay for it. The qualifications for hardship distributions are stricter and the penalties harsher than for loans taken from a retirement account.

Plan Eligibility for Hardship Distributions

Certain retirement plans may, but are not required to, allow participating Chula Vista residents to receive hardship distributions. 401(k), 403(b) and 457(b) plans may provide for these types of distributions, and the IRS gives specific guidance for these three types of plans. To see if your plan gives you this option, check the plan documents you received when you enrolled or check with your plan administrator or wealth manager. Each plan will also specify the documentation required to prove your financial hardship; generally, this documentation will require you to describe the hardship you are undergoing and verify that you don’t have other resources to pay for it.

To Read On:
Click on the link below to read more about the in’s and out’s of borrowing and withdrawing from your retirement fund…
Retirement Planning Chula Vista, PART 3

Let’s Get Connected!
If you want to get started on your journey today or would like individualized investment/financial advice from LPL financial advisor, John Lohrenz, please contact JKL Wealth Management at:

Phone: (858) 535-1705
Fax: (858) 535-1701
Email: john.lohrenz@lpl.com

Alternatively, fill out the Contact Form and we’ll get back to you shortly.

Physical Address
731 S. Hwy 101, Suite 2K, Solana Beach CA 92075

Securities and Advisory services offered through LPL Financial, a registered investment Advisor. Member FINRA/SIPC.


About Chula Vista, California

Chula Vista – the seventh biggest city in the southern parts of California – is a City Council governed area in the heart of San Diego metropolitan region. Chula Vista gets its name from the picturesque area in which it is ideally located, between the mountain foothills and San Diego Bay. Chula Vista is arranged into two unique neighborhoods including West Chula Vista, which stretches south of L Street and west of Hilltop Drive, and East Chula Vista. The top business employers in Chula Vista include Sweetwater Union High School District, Sharp Chula Medical Center and Wal-Mart among other top names. Tourism is a main driver of the city’s economy with tourist attractions like the Chula Marina and Sleep Train Amphitheatre drawing in the crowds.