Borrowing money is an accepted part of everyday American life. It’s the way many finance college, buy homes and achieve personal dreams. It’s also how some of us manage unexpected expenses or temporary financial setbacks. When faced with pressing financial needs, you may be looking for a fast solution and might be tempted to turn to your largest account—your retirement plan. But, other better options exist.

First, Decide If Borrowing Is Even Necessary

While credit cards, loans or lines of credit are valuable resources, there may be other ways to achieve your goal.

  • Is it possible to have another source of income that could temporarily help satisfy your financial need? 

  • Can you work out a plan with creditors or renegotiate payments or terms with them? 
  • Are there places in your budget where you can cut back or pool resources with others? For example, you could cut out nonessential services (like cable TV), find lower-cost options or swap services (like lawn maintenance).

  • Some utility companies may work with you to set up a plan to spread your costs evenly over a year. So instead of fluctuating payments each month with some high months and some low months, you’ll have one average payment that you can expect to pay each month. 

  • Do you have valuable personal assets like an extra car or jewelry you could sell? 
  • Do you qualify for assistance? Although you may have already considered government programs like food stamps, there are other programs that can help with medicine and fuel costs.

Consider Your Borrowing Alternatives

If none of these methods work for you, and you need to borrow, do some research to learn what might best meet your financial goals.

  1. After considering all your options, you may decide that a loan would be the best solution. A loan will have a set period of time you’ll need to pay it back and fixed monthly payments or “installments.” Once you’ve determined how much you need, you can decide on which loan type would make sense.
  2. A personal loan is a good starting point because it can provide funds for a variety of needs, from debt consolidation to home improvements. Personal loans are either secured or unsecured. In a secured loan, you pledge an asset, such as a car, as collateral to guarantee the loan. You’ll still own the asset (unless you fail to repay the loan), but the lender will hold the title. Once the loan is repaid, the lender will transfer the asset back to you. An unsecured loan is based on your creditworthiness and doesn’t require you to use collateral.
  3. If you’re a homeowner, you may be able to borrow money using your home’s equity as collateral for a home equity loan. Home equity is the difference between your home’s current appraised value and the amount you still owe on your mortgage. For example, if your home is valued at $300,000 and you owe $200,000 on your mortgage, your home’s equity is $100,000. You may be able to take out a loan for a percentage of that amount, depending on your credit score and your lender. Two benefits to a home equity loan are that the interest rate is often lower than that of other loan types, since it’s secured by your house, and the interest you pay may be tax deductible.

Understand the Ramifications of Borrowing From Your Retirement Plan

If none of these options are available, and you have no choice but to use money from your retirement account, it’s important to understand the short- and long-term effects you can expect.

Retirement Account Loans. You can borrow from your retirement account and pay back that loan over time, with interest. Since you’ll be paying back the loan, it will have a lesser negative impact than just making a withdrawal. Some things to keep in mind:

  • Funds withdrawn for a loan can be subject to income tax and potential early withdrawal and other penalties. (However, if you’ve been adversely affected by COVID-19, you may be eligible to have the early withdrawal penalty waived.)

  • If you’re terminated or leave your job, you’ll probably have to pay your loan back immediately.
  • You could end up paying taxes twice. You’ll repay your loan with money that’s already been taxed and then potentially pay taxes again when you withdraw the money in retirement.

  • Retirement Account Hardship Withdrawals. If you believe you won’t have the available funds to repay a loan, a hardship withdrawal may be an option. Many retirement plans allow hardship withdrawals, but typically only under extreme circumstances, such as un-reimbursed medical expenses or to prevent foreclosure. You won’t need to repay your withdrawal, but you’ll need to pay taxes and penalties, and you’ll have a smaller account for retirement. 
  • Note: Under the CARES Act, those who have been negatively impacted by the COVID-19 pandemic are able to make early withdrawals (up to $100,000) without the standard 10% penalty. You may be eligible for this waiver if either of the following apply:

You, your spouse or a dependent have been diagnosed with COVID-19

You've suffered financial consequences as a result of the pandemic

If you’d like to learn more, Navy Federal has articles, tips and resources for retirement, improving finances and getting out of debt on our MakingCents Knowledge Center.