This Is When You Should Borrow From Your Retirement Account
Most experts say never borrow from retirement savings, but discover the four rare situations where it might actually make financial sense.
Retirement accounts like 401(k)s and IRAs are designed for long-term savings, and financial experts overwhelmingly advise against touching them early. Withdrawing or borrowing prematurely can trigger taxes, penalties, and lost compound growth that could derail your future security. However, there are narrow exceptions where accessing these funds might be justifiable—or even strategic. This article outlines the four key situations where borrowing from your retirement account could be appropriate, backed by IRS guidelines and expert insights. We’ll cover the rules, risks, and alternatives to help you decide wisely.
The General Rule: Hands Off Your Retirement Savings
Most financial advisors echo a simple mantra: never borrow from your retirement account. Why? Early access disrupts the power of compound interest. For instance, pulling $10,000 at age 35 could cost you over $100,000 by retirement age 65, assuming 7% annual returns. Additionally, traditional withdrawals before age 59½ incur a 10% IRS penalty plus income taxes, often totaling 30-40% in lost funds. Loans from 401(k)s avoid penalties if repaid but carry risks like job loss forcing immediate repayment.
Despite these warnings, life happens. Economic downturns, medical crises, or housing needs can make alternatives scarce. The key is distinguishing true necessities from conveniences. Below, we detail the four scenarios where experts might greenlight a retirement loan or hardship withdrawal.
1. To Avoid Foreclosure or Eviction
One of the strongest cases for tapping retirement funds is preventing homelessness. If you’re facing imminent foreclosure or eviction, a 401(k) loan or IRA hardship withdrawal can bridge the gap to stability. The IRS permits hardship distributions for reasons including “preventing eviction or foreclosure on your principal residence”.
How it works:
- 401(k) Loan: Borrow up to $50,000 or 50% of your vested balance (whichever is less). Repay within 5 years at prime +1-2% interest, which goes back to your account.
- IRA Hardship: No loans allowed; it’s a taxable distribution with 10% penalty unless you’re 59½+.
Risks include reduced retirement growth and default penalties if you leave your job. However, compared to credit card debt at 20%+ APR or bankruptcy, this can be cheaper. Case in point: During the 2008 recession, millions used 401(k) loans to stay housed, per DOL data. Always exhaust unemployment benefits, family aid, or refinancing first.
2. Major Medical Expenses
Healthcare crises don’t wait for retirement. The IRS allows penalty-free withdrawals from IRAs for qualified medical expenses exceeding 7.5% of adjusted gross income (AGI). For 401(k)s, loans are preferable to avoid taxes.
| Account Type | Access Method | Penalty? | Taxes? |
|---|---|---|---|
| 401(k) | Loan up to $50k | No, if repaid | No |
| IRA | Hardship withdrawal | Waived for qual. med. expenses | Yes, on amount over AGI threshold |
Examples include surgeries, treatments, or insurance premiums during unemployment. In 2023, average family deductibles hit $3,000+, per Kaiser Family Foundation, pushing many to retirement funds. Pro tip: Document everything for IRS audits. Alternatives like health savings accounts (HSAs) or payment plans should be tapped first.
3. Higher Education Costs for You or Family
College tuition can strain budgets, but retirement loans offer a low-interest lifeline. IRAs allow penalty-free withdrawals for qualified higher education expenses (tuition, fees, books, supplies) for you, spouse, children, or grandchildren. 401(k) loans work similarly without tax hits.
Consider this: Student loans average 5-7% interest, while 401(k) loans are ~5-6% and self-funded. A $20,000 loan repaid over 5 years costs less than federal PLUS loans. However, this trades future security for present education—only do it if scholarships, grants, or work-study fall short.
- Pros: No credit check, quick access.
- Cons: Opportunity cost of growth; can’t repay IRA withdrawals.
Per Federal Reserve data, 45 million Americans hold $1.7 trillion in student debt; using retirement funds strategically avoids adding to that pile.
4. Buying Your First Home
First-time homebuyers get special IRS leeway. You can withdraw up to $10,000 penalty-free from an IRA for a principal residence purchase (once per lifetime). 401(k) loans up to $50,000 are also viable, often with longer repayment if for home purchase.
Definition of “first-time” buyer: Haven’t owned a home in the past 2 years. Use for down payment, closing costs, or principal reduction. Median home prices exceed $400,000 in 2025, per NAR, making this a game-changer for millennials.
Steps to qualify:
- Certify intent to occupy as principal residence within 120 days.
- Complete purchase within 120 days of withdrawal.
- Taxes still apply on traditional IRA/401(k) funds.
Roth IRAs sweeten the deal: Contributions (not earnings) withdrawable anytime tax/penalty-free. Exhaust FHA loans or gifts before raiding retirement.
Risks and Downsides of Borrowing from Retirement
Even in these scenarios, proceed cautiously:
- Market Risk: Borrowing reduces invested balance during upswings.
- Job Loss: 401(k) loans due in full within 60-90 days, triggering taxes/penalties.
- Opportunity Cost: Missed employer matches during loan period.
- Double Taxation: Loan repayments with after-tax dollars.
Comments on financial forums warn: “Never borrow against your 401k… ever,” citing poverty risks. Balance this with data: 88% of loans repaid on time, per PSCA.
Alternatives to Retirement Borrowing
Prioritize these before dipping into savings:
| Option | Pros | Cons |
|---|---|---|
| Emergency Fund | No interest/debt | May not exist |
| 0% Balance Transfer Cards | Intro APR savings | Credit score hit |
| Personal Loans/HELOC | Lower rates | Collateral risk |
| Government Aid | Free/low-cost | Bureaucracy |
Build a 3-6 month fund to avoid future needs.
Frequently Asked Questions (FAQs)
Q: Can I borrow from my IRA like a 401(k)?
A: No, IRAs don’t allow loans—only withdrawals, which are taxable and often penalized.
Q: What happens if I default on a 401(k) loan?
A: Treated as distribution: 10% penalty + income taxes if under 59½.
Q: Are Roth 401(k) loans different?
A: Rules same as traditional; repayments not tax-deductible.
Q: Can I take multiple loans?
A: Often yes, but total can’t exceed limits; check plan rules.
Q: Is borrowing better than withdrawing?
A: Yes—loans preserve growth if repaid timely.
Final Thoughts: Borrow Wisely or Not at All
These four scenarios—foreclosure/eviction, medical bills, education, and first homes—represent the rare times borrowing from retirement might align with long-term goals. Consult a fiduciary advisor and run projections. Most cases? Build buffers elsewhere. Protect your nest egg; it’s your future self’s lifeline.
References
- Retirement Topics – Hardship Distributions — Internal Revenue Service (IRS). 2024-10-15. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-hardship-distributions
- Publication 590-B (2024), Distributions from Individual Retirement Arrangements (IRAs) — Internal Revenue Service (IRS). 2024-12-01. https://www.irs.gov/publications/p590b
- 401(k) Resource Guide – Plan Participants – General Distribution Rules — U.S. Department of Labor (DOL). 2025-01-10. https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/publications/401k-plan-participant-resource-guide-general-distribution-rules
- Retirement Topics – Loans — Internal Revenue Service (IRS). 2024-11-20. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-loans
- Employee Benefits Security Administration – 401(k) Loans — U.S. Department of Labor (DOL). 2024-09-05. https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/401k-loans
- Financial Literacy Month — FNB Community Bank. 2023-04-12. https://www.fnbmwc.com/about/blog/post.html?title=financial-literacy-month
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