4 Times Raiding Your Retirement Accounts Early Is Okay

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Borrowing from your retirement accounts should rarely be your first choice to cover unexpected expenses. Even if your need is severe, there are often better and cheaper ways that won't narrow your future.

But the truth is that there are times when getting a loan from your retirement account isn't the worst choice you can make. If you're in one of the following situations, a loan from your retirement account might actually be a reasonable solution.

1. You're Facing Severe Financial Hardship

By "severe financial hardship," I'm thinking the extreme of extremes here. If you're not sure you can keep the lights on or feed your family, a retirement loan is probably better than your alternatives.

Even in this situation, though, you need to have a plan. Retirement loans must be repaid, and the money usually comes directly out of your paycheck. If you're not getting a regular paycheck, you need to figure out how to repay the money. You will also want to consider whether you want a "hardship" loan or a regular one. If you can prove the hardship, those loans are usually easier and faster but, depending on your company, they may have other drawbacks.

2. It Is Your Low-Cost Option

If you've calculated the costs of all of your loan options, and a loan from your retirement accounts is the cheapest option, then you need to consider taking it. However, it's important to remember that you cannot ever calculate the cost of a retirement loan accurately, because you don't know how much more money your retirement funds would have earned if you had left them in the account the whole time.

Both credit card debt and payday loans are examples of potentially very high interest loans that could potentially be paid off cheaper with a retirement loan. It's often possible, though, to negotiate your credit card payments lower, or even to negotiate a lower amount that you can pay off instead of the total. Try these options before you take out a retirement loan.

3. You Can't Get a Regular Loan

If you have a bankruptcy or even a short sale on your financial record, your credit may be too low to even be able to get a conventional loan. If there's not another way to get the money and you can't put off your need until later, then a loan from your retirement account may be what you need to get you through.

Be sure that you're taking the overall tax situation into account when you consider this, though. You'll be charged a penalty for taking the money out, and the money may be taxed as income, too. Then, once it's repaid and you're taking it out for retirement, you may pay taxes on it again. Talk to someone about the specifics of your situation, so you know exactly what you're getting into. Unless your need is so urgent you cannot wait on a regular loan, all of this may be too much to pay!

4. You Are Making the Best Investment… Ever!

The most-controversial-but-still-probably-ok reason to take money out of your retirement accounts before retirement age is because you're making some kind of insane investment. Are you financing a business or putting yourself through school? Then the loan might be acceptable.

As always, calculate the costs of the loan as best you can. While you can't absolutely calculate how much money you will make from a business or how much more you'll make with further education, do your research. If you're not going to improve your situation significantly or you find you can get a low-interest education loan instead, you're probably better off leaving your retirement money where it is.

Considerations Before You Take Out a Retirement Loan

Sure, there are times when a retirement loan is your best option. While it's never a great choice, it's a better choice when the following things are true.

When Your Retirement Is Already Secure

Do you know how much you plan on needing for retirement? Do you already have that, and more? If you know your retirement is secure, then a loan from those accounts that doesn't dip into the money you will need is a better choice than when you're taking money from your future self.

When You Love Your Job

Since retirement loans have to be repaid, it's always better to take one out when you're working a job you love (and believe they plan to keep you there for a quite a while). If you want to quit — or you think you might get laid off or fired — a retirement loan is much more risky, since most companies will require you to pay off the entire balance within 60 days of your employment termination.

When You Need Money Fast

As long as you have the proper paperwork in place, you can usually get a loan from your retirement accounts fairly quickly. Since you won't have to apply or be approved, the process is more streamlined than with other loans. Sometimes, you won't have time to research all of your options or wait to hear back from a lender before you need your money, and in this case retirement loans can be your best choice.

When Your Need Is Short Term

If your retirement account loan is longer in duration, the negative effect on your retirement funds only grows. If, on the other hand, you take it out and can repay it in full in a matter of a few months, you've done minimal damage and covered your financial needs. In general, if your financial need will be over in less than a year and you can repay the money quickly at that point, a retirement loan is a better idea than it is if you will have to repay it slowly over years and years.

Have you ever taken a loan from your retirement accounts? How did it work out for you?