I have a roth IRA and a TSP account with money in both. With the government shutdown, would it be worth taking out a loan on either of these accounts to stay current on bills? If so, which would be better?
Thanks for reaching out. The short government shutdown and continued uncertainty has many people concerned about their paychecks.
I will come right out and tell you how I feel: if you borrow from your retirement plan you may be robbing your future to meet your present obligations. Try to avoid using your retirement plan to pay off debt, unless it becomes absolutely necessary. Ideally, debt management and retirement savings should be kept separate.
If you do borrow from your retirement account, you will have to repay that as a debt, but more importantly, you may lose out on the power of compound earnings because the money will no longer have the potential to grow in your plan during the time of the loan. This could significantly impact your ability to meet your retirement goal.
Additionally, if you fail to comply with the repayment rules for an employer-sponsored retirement plan loan, it could result in the loan being treated as a taxable distribution, subjecting you to income taxes as well as a 10% early withdrawal penalty if you are under the age of 59 ½. Check out this example: https://www.usaa.com/inet/wc/adv_advice-finances-borrowingfromretirement-ig
Before borrowing from your employer-sponsored retirement plan, I would recommend you follow the steps below:
Step One: Speak with a financial advisor to review your overall situation and the impact to your retirement goal
What other sources of savings do you have that can fill this income gap?
What’s the true cost of the loan compared to the debts you are trying to pay off with the loan to see which costs more in the long-run?
How will it impact your ability to retire at the lifestyle you desire or need?
What got you into this position in the first place and how can you prevent it from happening again?
Step Two: Explore alternative options for repaying your debts
Gather all your statements and a copy of your credit report to understand what you owe
Establish a debt repayment plan to attack the debt
Consider consolidating debts to a lower interest rate or doing a balance transfer on credit card balances
Ask for help if you are struggling to pay your bills by directly contacting your creditors to discuss payment options or speak with your local, non-profit consumer credit counseling agency (such as the NFCC)
Step Three: Have a plan moving forward
Create and follow a budget so you’ll know how much you have available to safely spend and to look for ways to cut back on optional expenses
Properly manage the amount you borrow – pay on time every time and don’t ever borrow more than you need
Here is my favorite: Establish an emergency fund for unexpected expenses, pay disruption, etc.
Start small with a $1,000 emergency fund; then build to one month; and then finally up to at least three to six months’ worth of basic monthly living expenses. Our Savings Booster tool can help you set up automatic savings transfers.
Once you cut back on optional expenses, redirect any available cash flow to your emergency fund first before paying extra on debts, so that you can avoid using debt to handle unexpected expenses. Be sure to pay at least the minimum payment due to stay current on any debt you have. Paycheck Planner can help you track your cashflow and look for opportunities.
Good luck – please let us know how you are doing.
P.S. USAA is offering our active duty military members impacted by the government shutdown, including those assigned to Belgium, Canada, China, Germany, the Philippines, South Korea, Spain, Ireland & the UK, with a no interest, 0% APR loan. Members must have an existing direct deposit at USAA Bank. While we remain hopeful a deal can be reached, click here to learn more about how we can help.