We all know that saving for retirement should be the top priority to ensure financial security after your working years, but we also know that life happens and having cash-on-hand is necessary to meet life circumstances and emergencies. While the contributions you make to your PERA Defined Benefit account are not accessible while you are still working for a PERA employer, you do have the ability to take a loan from your PERAPlus 401(k) or 457 accounts.
Members may take a loan from their 401(k) and 457 accounts within IRS limits, however, this may not be the best option in every situation. For example, if you can plan for a large purchase such as a car or a home, a more traditional loan may be the right choice. An unexpected emergency where the loan could be paid back quickly could be a situation to borrow against your retirement savings. The decision will be based on your personal situation, but here are a few things to consider:
- The loan is limited to 50% of the account balance or $50,000 whichever is lesser.
- The IRS allows you to borrow up to $50,000 per year from your 401(k) and/or 457 account in total.
- The loan must be paid back within five years.
- Defaulting on the loan could be considered an early distribution if you are under 59 ½ and trigger taxes and a tax penalty of 10%.
- In most cases, requesting a loan is quick and doesn’t require a credit check.
- Borrowing from your 401(k) or 457 doesn’t impact your credit score.
- The interest rate on the 401(k) or 457 loan may be less than the interest rate on a credit card or personal loan.
- Borrowing money from your 401(k) or 457 account may impact your retirement savings depending on the length of the loan, market performance and your ability to continue contributions during the loan period.
- There is $75 nonrefundable loan application fee charged for each PERAPlus loan.
There are no restrictions on what 401(k) and 457 loans may be used for, but many advisors suggest these loans should be reserved for true emergencies to ensure you have adequate resources in retirement. For more information about opening a PERAPlus account or a loan, visit coperaplus.org. To learn more about voluntary investment options with PERA, visit our website and browse our live webinar schedule. Our team hosts live presentations about Enrolling in PERAPlus, Investing Made Simple, and Developing a Savings Plan.