Even public figures can’t justify a 401(k) loan

Last week, in an interview, presidential hopeful Marco Rubio admitted he recently took out a $68,000 loan from his retirement plan. He stated these funds will be used for a few house repairs, his kids schooling, and his campaign trail goals.

This isn’t a unique situation.  Sure, the amount withdrawn may be different and the reason for the withdrawal depends on your situation, but it all boils down to the same thing. A loan from a retirement account prior to age of 59 1/2 is a reaction to a perceived emergency. For Rubio, it was a $3,000 refrigerator. No seriously, his fridge broke and it was the impetus to the withdraw. It sounds trivial, but really all reasons for withdrawing from your retirement account are.

“The money that we put into retirement accounts is typically reserved for our retirement years. And by definition, our retirement years don’t technically start until we’re 59 1/2 years old. That’s an IRS thing. But there’s a very good reason the IRS is involved in this retirement age scenario. The IRS allows us to grow our retirement accounts on a tax-deferred basis. This means as your retirement grows (hopefully) every year, you don’t have to pay taxes on the growth.

If you have investments outside of a qualified retirement account, you do have to pay taxes on the growth. And when it comes to a traditional IRA, 401(k), or other pre-tax employer-based retirement plan, you haven’t paid tax on any of the money in the account; that’s because the income you used to make the deposits was excluded from your taxable income in the year in which you earned it. This is expressly why there’s taxation occurs upon early withdrawal, with an additional early withdrawal penalty of 10 percent.” (courtesy of Indy Star)

There is always an excuse. If you can’t get behind the idea it’s bad for your future, at least understand how painful the taxes and fees will be.  Whatever your reason or need for a financial bailout may be, seek alternative funding options. Really any option is better than robbing your future.

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