PLANADVISER - January/February 2022 - 37

variety of financial needs for which they may turn to their
plan to fill. And whatever caused the need, raiding one's
retirement savings can hurt.
" If they don't repay the money, it has an incredibly large,
long-term impact on their ability to retire, " Cellini says. He
adds that it always makes more sense to take a plan loan
rather than a distribution. Once a participant takes a distribution,
" he has essentially experienced permanent capital
loss because he's had to pay the tax bill on it, and there's
no ability for that money to continue to grow, tax deferred. "
People should determine to take funds from their retirement
plan only " when they're truly in the retirement phase, "
he says, and even then based on need. He encourages
employees to grow an emergency fund so they have a buffer
in place and can keep their retirement account intact, he says.
Ellen Lander, principal and founder of Renaissance Benefit
Advisors Group LLC, in New York City, stresses that borrowing
of any kind should be avoided whenever possible. Yet, " things
can happen, and there may be times when [people] have to
borrow, " she says, noting that employees should be reassured
that this is no reason not to join a DC plan.
From Lander's experience, most people consider the
funds in their retirement plan as illiquid and untouchable-
at least not without a severe penalty. Nevertheless, she says,
participants can leverage their account when they have to
borrow because they can do so from their plan at a more
favorable interest rate than from a bank or by credit card.
She also points out that if a DC plan matches employee
contributions, this yields an added advantage. " I can borrow
from my plan [in emergencies], and I've saved money, and
I also got the matching contributions, " which continue to
earning, Lander says. " But if I'm concerned about future
debt and choose not to be in a defined contribution plan,
then I get nothing from my employer. "
Lander says she is a big believer in " merchandizing the
DC plan, " which she explains as getting people to make savvy
decisions and understand that the plan can be a financial
tool, particularly when it comes to loans. For example, she
says, if someone's roof caves in and causes a sudden and
unexpected expense, and there is too little insurance and
no emergency fund, then that person will have to borrow
the money from somewhere.
" I can borrow it from the bank, maybe, or I can put it on
my credit card, " she says, though she cites the time and
effort involved in applying for a bank loan, with no guarantee
that the loan will be approved, or high interest rates if
it is. " Credit cards are even worse: If I pay for that roof on my
credit card, what am I paying-21% interest? "
Because most retirement plans have an interest rate of
either the prime rate or the prime rate plus 1%, " you're able
to borrow the way a corporation can borrow-not at 21%
interest, " Lander observes.
John Bartlett, director of retirement services at CFS
Investment Advisory Services, in North Arlington, New
Jersey, likens credit card interest rates to those provided
by loan sharks. He also recommends borrowing from the
employer DC plan, vs. taking a hardship distribution, in
cases of unexpected financial need. " If you take a hardship
distribution, you're looking at almost 40% in taxes, plus the
penalty to have access to that money. That can be detrimental
to any retirement planning, " Bartlett says.
Not only do participants receive a more favorable
interest rate, but they also get to pay themselves back
and, with standard plan loans, can do this over a five-year
period, he says. -Michael Katz
Exceptions to the
Early Distribution Tax
TO DISCOURAGE the use of retirement funds for other than
normal retirement, federal law imposes a 10% additional tax
on certain early distributions from certain retirement plans.
The added tax is 10% of the portion of the distribution that is
includible in gross income. Generally, early distributions are
those drawn from a qualified retirement plan or deferred
annuity contract before the participant reaches age 59.5.
The IRS exceptions to this penalty include distributions made:
* To a beneficiary or estate after the participant's death;
* To a participant who is totally and permanently disabled;
* To individuals called to active duty for at least 180 days
after September 11, 2001;
* To the participant of a defined contribution (DC) plan or
individual retirement account (IRA), of up to $5,000, for a
qualified birth or adoption distribution;
* To an alternate payee under a qualified domestic
relations order (QDRO)-e.g., for alimony or child support;
* As part of a series of substantially equal periodic
payments over a participant's life expectancy, or the life
expectancy of a beneficiary; however, the participant
must leave his job before the payments begin;
* That have resulted from an IRS levy of the plan;
* That are dividends from an employee stock ownership
plan (ESOP);
* When deductible medical expenses exceed 7.5% of the
participant's adjusted gross income;
* When the participant has separated from his employer, if
he did so in or after the year he reached 55-or, if he is
in a qualified governmental benefit plan for public safety
employees, he left work in or after the year he reached
50; and
* When they are exempt from the additional income tax by
federal legislation relating to certain emergencies and
disasters. -MK
planadviser.com January-February 2022 | 37
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PLANADVISER - January/February 2022

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