02 Oct Can State Employees Borrow from their Retirement?
As a teacher, you may be wondering, “Can I borrow from my TRS?” Borrowing money from your teacher retirement system (TRS) is not ideal. But, if you find yourself in a pinch, and need money fast, it may be the only option.
At Appreciation Financial, we want to make sure you understand your options, and the potential long-term cost of borrowing from your retirement funds.
Can I Borrow From My TRS?
The short answer is it depends on where you live. Many states, like Georgia, Texas, and Illinois do not allow you to borrow from your TRS account. New York, on the other hand, allows you to borrow up to 75% of your personal TRS contributions. If you leave teaching before you retire, you may withdraw your personal contributions.
If your teacher pension includes a 403(b), it is likely that you can borrow from your retirement. Most plans allow you to borrow up to 50% of your account’s vested balance, with a maximum loan amount of $50,000. However, just because you can borrow from your 403(b), does not mean you should.
Why Shouldn’t I Borrow from my 403(b)?
Generally, tax deferred annuity (TDA) loans have shorter repayment periods (up to five years). The loan must be paid in full within that time—otherwise it is considered a disbursement, which means you will be paying taxes on the amount borrowed. If you are below retirement age, you will also pay an early-withdrawal penalty.
While the loan is in repayment, you will not be able to leave your job. If you do, you will typically have between 60 and 90 days to repay the loan in full. Another consideration is that TDA loans are repaid with post-tax dollars, as opposed to pre-tax dollars.
I Understand the Risks. I Still Need to Borrow from my Pension.
There are three main things to consider when you are thinking about borrowing money from your TRS:
- How much money do I need?
- What impact will this loan have on my retirement?
- What fees will I face by making a withdrawal from my pension?
1. How much money do I need?
You will only be able to borrow up to 50% of your vested contributions from your state pension. This comes with a maximum amount of $50,000. If you are needing a loan for some small emergency, this may be a good way to access the funds. You will not be able to borrow from your 403(b) to buy a house, but you could borrow from it to make a down payment.
2. What impact will this loan have on my retirement?
The impact on your retirement savings is two-fold when taking a loan. You are reducing your retirement savings by the principal amount of the loan.
Additionally, in this scenario, your retirement savings is now smaller, which means your growth is slower. This can have a big overall impact on your retirement funds.
One way you can help to overcome this is by paying the loan back as quickly as fiscally possible. This will help ensure that you are able to get back on track and do not lose as much in the long run.
3. What fees will I face by making a withdrawal from my pension?
If you pay your loan back within the designated time frame, the only fees you will face are the administrative fees for disbursing the loan. If you fail to pay back the total amount in time, you’ll face income taxes and an early withdrawal penalty of 10%.
There is an exception, however. If you are 59-½ and still working, you will not incur the 10% penalty. If you are 55 and retired, you will also not face any early withdrawal penalties.
Hire a Financial Professional
At Appreciation Financial, our agents are experienced in helping you get the most out of your retirement. We can help you decide if borrowing is right for you and find the optimal way to get the funds you need. Contact us for a consultation today.