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Step Away From That Growing Pile of Money

Selena Maranjian
June 13, 2011

The all-too-common practice of borrowing from retirement accounts is much more dangerous than you probably think.

Almost a fifth of all American workers have borrowed from retirement accounts in just the past year, according to a Bankrate survey. That rate has roughly held steady for about a decade. It's a little hard to criticize the practice amid a long recession rife with rising prices and high unemployment. Most of the people borrowing are probably doing so to pay their mortgage or buy food, not to splash out on a big-screen TV.

Lost opportunity
Still, it's important to understand that when you raid your retirement account, you're disrupting the vital growth process of compounding. Those who take permanently withdraw money early from a 401(k) account or IRA face 10% penalties in addition to taxes owed. You may feel safer borrowing from a 401(k) account, because you typically have five years to pay the money back without incurring a penalty -- longer, if you use it to buy a home.

But borrowing remains a losing proposition. If you borrow $10,000 from your account, and then repay it after five years, it will have lost five years in which it could have been growing for you. What will you lose? Check out the table below:

Time Period

At 8%, $10,000 Grows To

5 years