FOR RETIREMENT. Planning ahead. Understanding retirement plan loans. Plan Participant Guide

Transcription

1 FOR RETIREMENT Planning ahead Understanding retirement plan loans Plan Participant Guide

2 What is a retirement plan loan? More than eight out of 10 Americans take advantage of the retirement plan offered to them.¹ You might have considered borrowing from your employer-sponsored retirement plan account balance for a large purchase, such as a car or debt consolidation. However, when you borrow from your account, you receive the money as a loan. You repay the loan and loan interest to your account over time. ¹ Employee Benefit Research Institute, The 2010 Retirement Confidence Survey: Confidence Stabilizing, But Preparations Continue to Erode, March 2010: 18.

3 Retirement plan loan basics What should I consider when taking a retirement plan loan? There are several factors to consider before taking a loan from your employer-sponsored retirement plan: Once the money is borrowed, you will lose the potential for those funds to grow You repay the loan with after-tax dollars, losing the tax advantage of those pretax contributions borrowed There may be fees associated with the loan You may be inclined to reduce ongoing contributions in order to meet loan repayment requirements The real cost While it may be possible to take a loan from your employer-sponsored retirement plan, the real cost of doing so may be higher than you think. Be sure to consider all of the facts when deciding whether to borrow from your account. Account balance at age 35 Taking a loan* Without a loan $35,000 $35,000 Loan amount $5,500 $0 Loan period 5 years 0 years Loan interest rate 7.00% 0% Actual interest rate cost of loan Account balance after 30 years 12.26% 0% $875,707 $1,018,627 In this hypothetical example, the following assumptions were used: Assumes biweekly contributions of $150 (including 100% employer match) from age 35 through 65, except during the loan, where noted. Average market return of 9%. * Taking a loan: Assumes a loan of $5,500 taken at age 35 and biweekly contributions of $50 during the five-year loan period with a $50 biweekly loan payment. After the loan period, biweekly contributions would be increased to $150. Without a loan: Assumes biweekly contributions of $150 for the entire 30 years and no loans of any kind are taken from the plan. Assumes a total tax rate of 25%.

4 When you decide to borrow funds from your employer-sponsored retirement plan, you may be wondering how it works. How do I borrow money from my account? If you take a loan, you must complete a loan application. Check with your employer or Lincoln representative for the necessary form(s). Is there an initial fee for the loan? In many cases, there is an initial setup fee to cover loan processing expenses. The fee is usually added to the amount requested on the loan application. How much can I borrow? It depends on your specific plan guidelines, the amount of your account balance and the amount of any plan loans you currently have outstanding. In many cases, the loan minimum is $1,000, and the maximum is 50% of your vested account balance, not to exceed $50,000. When will I get my loan money? Checks for borrowed funds are typically issued within seven calendar days after Lincoln receives your completed loan application. Will I have to pay interest on my loan? Yes. When you request a loan, you will be provided with loan information. The current loan interest rate, which is fixed for the life of the loan, will be included in this information. Can I have more than one loan? Many plans allow you to maintain multiple loans. Check your plan for specific details.

5 How do I repay the loan? Depending on your plan, your repayments will be made through electronic fund transfers or payroll deductions. Once you re ready to repay your loan, you may have some additional questions. How long do I have to repay my loan? Generally, you can repay your loan over a period of five years. If you use your loan for specific purposes outlined by the IRS, such as to purchase your primary residence, you may have longer to repay the loan. Check with your employer for plan specifics. Can I still make regular contributions to my account while I m repaying the loan? Yes! To keep on track with your retirement goals, you should continue to make contributions to your plan. Missing even a small number of contributions can significantly affect your ending account balance, which may affect when you ll be able to retire. Can I make extra payments or repay my loan in full before the due date? Yes. You can make extra loan payments at any time or pay the entire balance at any time. If you make additional payments, they are applied first to any interest and principal due. Any remaining amount will be applied to the unpaid principal. Can I skip a payment? No. Payments are required to be made according to your predetermined payment schedule.

6 What happens if I miss a payment? If you have not made a payment for 90 days, your loan will be considered in default. In addition, a defaulted loan balance is reported to the IRS as taxable income to you. What happens if I die before I ve repaid my loan? The outstanding loan balance will be taxable to the estate, and your beneficiary(s) will receive your account balance less the outstanding loan balance. What happens if I ve overpaid my loan? If you overpay your total loan balance, you may be issued a refund check. See your plan for specific details. How does a loan affect my federal income tax? A loan is not considered taxable income to you as long as you make your scheduled payments and the loan does not default. However, if your loan defaults, the amount (default plus accrued interest) will be reported as a taxable distribution, and you ll receive a Form 1099-R.

7 To borrow or not? Deciding whether to borrow funds from your employer-sponsored retirement plan is a decision you should weigh carefully. While many plans allow a loan provision, it s important to remember the actual cost of taking those funds out. While you may pay the loan back with interest, those funds may have earned a better rate if they had remained invested in your account. Be sure to consider the full range of factors when borrowing funds, and decide if it s a step you feel good about taking. Talk to your financial professional today. With you every step of the way Whether you need help getting started, finding ways to save more, making sure you re investing wisely, or understanding your options as you near retirement, the Lincoln InStep Participant Retirement Program is designed to help you with every step of retirement planning.

8 Mutual funds and variable annuities are sold by prospectus. Investors are advised to carefully consider the investment objectives, risks, and charges and expenses of a mutual fund, and, in the case of a variable annuity, the variable contract and its underlying investment options. To obtain a mutual fund or variable annuity prospectus that contains this and other information call: 800 4LINCOLN. Read the prospectus carefully before investing or sending money. Variable annuities are long-term investment products designed particularly for retirement purposes and are subject to market fluctuation, investment risk and possible loss of principal. Variable annuities contain both investment and insurance components and have fees and charges, including mortality and expense, administrative and advisory fees. Optional features are available for an additional charge. The annuity s value fluctuates with the market value of the underlying investment options, and all assets accumulate tax-deferred. Withdrawals of earnings are taxable as ordinary income and, if taken prior to age 59½, may be subject to a 10% federal tax penalty. Withdrawals will reduce the death benefit and cash surrender value. There is no additional tax-deferral benefit for an annuity contract purchased in an IRA or other tax-qualified plan. Variable annuities sold in New York are issued by Lincoln Life & Annuity Company of New York, Syracuse, NY, and distributed by Lincoln Financial Distributors, Inc., a broker/dealer. For all other states, variable annuities are issued by The Lincoln National Life Insurance Company, Fort Wayne, IN, and distributed by Lincoln Financial Distributors, Inc., a broker/dealer. The Lincoln National Life Insurance Company does not solicit business in the state of New York, nor is it authorized to do so. Contractual obligations are backed by the claims-paying ability of the appropriate issuing company. The mutual fund-based programs include certain services provided by Lincoln Financial Advisors Corp. (LFA), a broker/dealer (member FINRA) and an affiliate of Lincoln Financial Group, 1300 S. Clinton St., Fort Wayne, IN Unaffiliated broker/dealers also may provide services to customers. Not a deposit Not FDIC-insured May go down in value Not insured by any federal government agency Not guaranteed by any bank or savings association 2011 Lincoln National Corporation Login: Employer Retirement Plans Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates. Affiliates are separately responsible for their own financial and contractual obligations. LCN TGI 10/11 Z04 Order code: DC-LOAN-BRC001