16 Nov Borrowing money for a wedding

Q. My fiance and I are getting married and we need about $15,000 for wedding expenses. Is it better to take money out of a retirement account or take a home equity loan? The home is worth about $150,000 and there’s $81,000 left on the mortgage.
— Getting hitched

A. Congratulations on your engagement!

A wedding is (hopefully) a once-in-a-lifetime opportunity, but if you’re not careful, wedding costs can stay with you for years and years.

Before you consider the borrowing options, think about other alternatives.

To use your language, “it is better,” of course, to save for a wedding and it’s expenses in advance, said Debra Morrison, a certified financial planner with Empowered Retirement in Lincoln Park .

“I don’t say that to cast judgment, yet to make a point that most of life’s major events are those which can be anticipated — and saved for — in advance,” she said.

Morrison said you will face other major expenses as a couple — children, education, car replacements, travel, second home wishes and more. All of these can be funded by earmarking savings, Morrison said.

“Borrowing now for a wedding simply sets you back as a couple with yet one more pile of debt, needing to be repaid long after the wedding day,” she said.

If postponing the wedding to have more time to save isn’t an option, then you’re smart to consider the best borrowing choices.

If you have built up savings in your retirement accounts, it may seem like a good idea to find a way to access them to pay for wedding expenses, said Michael Green, a certified financial planner with Wechter Feldman Wealth Management in Parsippany.

After all, you have many years until retirement to build those savings up again, right? Well, that is most likely not the best option, Green said.

To gain access to the funds in your retirement accounts, he said, you probably have two choices.

If the assets are in an IRA account, you would be taking a withdrawal, which may be taxed and if you are under age 59 ½ you would also incur a 10 percent penalty.

Plus, Green said, when you take assets from your IRA account, unless you deposit them back within 60 days, you can only replenish the account based on IRA contribution limits. For 2015 and 2016 that limit is $5,500. With the current limits, it would take more than two years just to get the amount you withdrew back into the IRA account. Meanwhile, that is a lot of time for lost potential earnings, Green said.

You may also be considering taking a loan from your employer 401(k) plan.

“While many people consider the payments they make back into their 401(k) to pay off a loan to be `paying themselves back,’ the reality is that while the funds are withdrawn from the 401(k) account and during the payback period, there is the potential for lost earnings and growth on those dollars,” Green said. “In addition, many people tend to cut their contribution rate while in the payback period also limiting the overall dollars at work.”

There are other risks.

You still must repay the loan despite the fact that you “borrowed from yourself,” Green said. Should you fail to pay the loan back, there will be stiff penalties and taxes owed.

Also, should you leave your job for any reason with an outstanding balance on your loan, you only have 60 days to pay off that balance, he said.

“In most cases, when someone loses their source of income they rarely have extra money to fully pay back a loan,” Green said. “If the balance is not paid back within 60 days you may have to declare the entire amount of the loan as a taxable distribution. In addition, this could trigger a 10 percent penalty on the entire amount borrowed.”

Green said borrowing from your home’s equity sounds more reasonable.

“Taking a home equity loan will allow your retirement assets to continue growing and compounding returns for your eventual retirement years,” Green said. “The interest you are paying on a $15,000 home equity loan may be tax deductible, whereas the interest on a qualified retirement plan loan would not.”

In some cases, Green said, the interest rate paid on your home equity loan will be lower than other types of loans. Also, if you choose to do so, you can use some of the gift money you receive for your wedding to pay down the home equity loan balance.

Morrison did a little math to show why, if you can, you should try to borrow the smallest possible amount.

A $15,000 loan from a retirement plan will cost you $269.53 per month at 3 percent interest, she said.

If you are able to trim even $3,000 from your expenses and only borrow, $12,000, that monthly repayment amount, also at 3 percent interest, would only be $215.62, and borrowing only $10,000 at 3 percent interest for 5 years would cost only $179.69.

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This story was first posted in November 2015.