Things to consider before you borrow from the Retirement Savings Plan

June 04, 2019

Although Retirement Savings Plan participants may borrow from their account through a loan feature, here are some things to consider before taking that step.

If you participate in the Retirement Savings Plan of the Presbyterian Church (U.S.A.) (RSP), you may be able to borrow from your account if you’re in a financial pinch. Before you do that, however, make sure you understand the rules, costs, and ramifications — including how it may affect your retirement savings goals.

  • Restrictions: RSP loans are limited to the lesser of 50 percent of your account balance or $50,000, minus your highest loan balance in the past 12 months. You must repay the loan, with interest, within five years (or 15 years, if the loan is used to buy a primary residence).
  • Impact on retirement goals: Once you take money out of the RSP, it is no longer invested, and you lose the benefit of potential earnings — along with the compounding effect of growth on that money. In other words, borrowing from the RSP may detour you on your path to a financially sound retirement.
  • Double taxation: When you contribute to the RSP on a pretax basis and then borrow from your account, you end up paying taxes on both the loan repayment (which comes from after-tax income) and future distributions.
  • Budget impact: Depending on how much you borrow, repayment of the loan — through automatic deductions from your bank account — may have a significant impact on your household budget.
  • Cost of default: If you default on repayment, the outstanding balance will be taxed as a distribution. If you have not yet reached age 59 ½, you’ll also pay a 10 percent penalty.

Considering a loan from the RSP? Talk with your financial advisor first, or contact a Fidelity retirement planning consultant at 800-420-2363.