By Maurie Backman

Without independent savings, retirees risk struggling financially during their golden years. That’s why workers are advised to sock away funds in an IRA or 401(k) — to ensure that they have enough money to cover their living expenses when they’re older.

But data from J.P. Morgan Asset Management reveals that workers across all income levels are borrowing money from their retirement plans. And that’s a troubling trend. The problem with borrowing from your retirement plan Though middle-income earners are more likely to take a loan from a retirement plan than lower and higher earners, it’s a habit all three groups are upholding.

Now at first glance, borrowing against your own retirement savings might seem to make sense. After all, that money is yours, so why deal with a bank when you can access funds that are already in your name and restore them when you can? Here’s the problem, though: Borrowing against a retirement plan is risky, and if you’re not careful, you could wind up getting hurt financially. Now to be clear, only 401(k) plans actually allow you to take out a loan, so let’s discuss those first.

Whether you can get a loan from your 401(k) will depend on your plan’s rules, but usually, you can borrow the lesser of $50,000 or 50% of your vested balance (the balance you own outright). And some plans allow you to borrow up to $10,000 even if that represents more than your vested balance. Once you borrow that money, you’ll generally need to repay it within five years, paying interest all the while, but to yourself, which isn’t such a terrible thing.

What is terrible, however, is that if you fail to repay your loan on time, it will be treated by the IRS as an early withdrawal, and that means you’ll be subject to a 10% penalty for removing funds from your 401(k) prematurely, assuming you haven’t yet reached the age of 59-1/2. (If you are 59-1/2, you’re probably not contemplating a 401(k) loan, because you have the option to just take a withdrawal as you wish.)

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