Is a loan the best decision for an employee’s financial future?

Most retirement plans allow participants to take a loan from their account — typically to help cover a sudden financial emergency or a large purchase like a home.

And while both plan sponsors and participants agree that this plan design feature adds value and flexibility to a retirement plan, retirement plan loans should be taken with caution.

It’s important to recognize that while this can be a great resource if a loan is financially necessary, taking a loan eliminates the possibility of potential growth since the loan principal is uninvested over the life of the loan.

So how can you as a plan sponsor help your employees understand the impact a loan will have on their financial future?

Educating employees about the advantages and disadvantages of borrowing from a retirement account allows them to make an informed decision. While employees may already know about the availability, ease and convenience of plan loans, they may want to consider the following before taking out a loan:

• Loan repayments back to the account will be made with after-tax money.
• The repayments will be subject to taxes again when the money is distributed from the plan (e.g., a form of double taxation will occur on the loan interest).
• It can be difficult to continue saving for retirement and paying back a loan at the same time.
• The payback amount will include interest.
• If a loan isn’t repaid, the outstanding balance will be treated as a taxable withdrawal subject to both income tax and a possible 10% early withdrawal penalty.

Fully comprehending the pros and cons of receiving the loan will equip employees with the necessary information as they make a decision regarding their financial future. So make sure you do your part to help educate your employees considering a loan.

If you have any questions regarding loans, please contact us at 1-888-98-GUIDE (1-888-984-8433).

This information should not be considered tax or legal advice. GuideStone® stands ready to assist your organization as you work with your legal and tax advisors by providing resource information that you and your advisor may find beneficial.