What to tell participants about tapping into their retirement savings

Sep 5, 2023
  • BlackRock

Participants may be worried. Even if their job is secure, they may face economic hardship if a family member is laid off or loses income due to a slowdown. If the worst happens, they may look to their retirement plan as a source of financial relief.

Now is the time to get out in front of participants with straight talk about the potential impacts of taking money from their retirement plan. Borrowing or withdrawals after a steep market decline can amplify all the drawback of a loan – in effect, they may be selling out when the market’s low and buying back in later, when it may be higher, or not buying back at all.

The ability to access retirement assets may be important for participants’ peace of mind, but it’s critical they make an informed choice. While plan sponsors should review the plan's rules to help prepare their communications, the FAQs below may offer a starting point for addressing participant inquiries.

Are you thinking about taking money from your retirement plan

Anyone can face unexpected financial difficulties. Here are a few things to consider before making a decision.

  • Take a look at the plan's rules
    For loans, make sure you are aware of the maximum amount, repayment terms and timing. For hardship withdrawals, confirm that you meet the applicable eligibility criteria.
  • Think about your long term goals
    No matter what stage of life you're in, it’s important to think about retirement savings as your paycheck after you retire. Letting your savings grow today can help you feel more comfortable down the road.
  • Are there other sources of emergency funds?
    Personal or equity loans, or loans from a family member instead, may leave retirement funds in place to build for your future.
  • Potential financial implications
    It's important to consider all the possible implications of taking a loan or withdrawal. For instance, borrowing after a severe market decline may “lock in” losses if you are not invested during a market rebound. In effect, you may be selling low and buying high.
  • Remember: Unrepaid loans may be treated like income.
    If you leave your job with an unpaid loan, it may be treated – and taxed – as income, potentially adding another cost. In addition, early withdrawal penalties may apply to unpaid loan balances if you are under 59 ½. 
  • Seek out advice
     If you need more help making a decision, speak to a tax advisor, consult with your plan sponsor, or review guidance from the Internal Revenue Service.