We are drowning in credit card debt...why can't we use a portion of my husbands 401K??

Question

My husband and I have racked up $12000 in credit card debt. He has $48,000 in his 401K. We're young...and the interest is only climbing on our credit card debts. I feel like we're getting nowhere. Why can't we tap into a portion of that to clear our debts? Isn't there a loophole or one time allowance? I've heard that if you're about to forclose on your home you can access it...but who wants to get to THAT point before getting help?

Richard B...it's $12,000...not $120,000. It was accumulated paying for college (what loans would not cover)

snvffy...I went to Dave's website...if I can't pay my bills...how could I pay $90 to get his advice??

Answer 1

debt consolidation

getting out of debt is pretty easy with a debt consolidation plan
however it may get a bit tricky at times, I suggest you get as much information as possible online on this first,

a good place to start in my humble opinion is:

http://umgarticles.atspace.com/debt-consolidation.htm

Answer 2

OK - get things into proportion. By today's standards $12,000 isn't over much compared to most American households.

Your 401k is best left alone. Keep that going. You'll need it later.

If you have a house on mortgage, your best option might be to get a secured debt consolidation loan. This means that you borrow money to pay off your credit cards using your house as security. This sounds a bit scary but it needn't be if you are careful.

You get a new loan on your house which will pay off your credit cards. But to avoid the trap that many people fall into, you MUST cut up all but one of your credit cards after they are repaid. And the one remaining must only be used for essential purposes and paid in full every month. That way you don't accumulate any more debt. That's how you regain control and live within your means.

If you do it this way you can end the nightmare.

This website has a lot of useful information.

Good luck!

Answer 3

As already stated, withdrawing from your 401k is a terrible idea. The taxes and penalties will kill you!

First go through the nonsense of negotiating with your creditors and see if they can knock down some of the debt, or offer some payment plans you can afford.

Next, take out a loan from your 401k. The advantage is there is no penalty, and you pay no taxes. But you will pay interest on this loan. The good news is the interest goes back into your 401k, so in effect you are borrowing money from yourself.

Doing these two things should get you out of your situation. $12000 is a lot, but it's managible.

Answer 4

First of all - it's not a real good idea to pull money out of retirement plan, since you'll need it someday. And putting it in starting young as you've been doing, and letting it appreciate, is one of the best ways to have a decent sum for retirement.

But sounds like otherwise you're facing some real impossible bills. You and your husband are to be congratulated for building up that much in the 401K in the first place, if you're young.

Most but not all employer 401K plans have a provision for withdrawal of funds for hardship purposes (and you might qualify there, depending on the plan), and a provision for taking a loan against the balance. You need to check with his employer to see what the rules are.

If you withdraw money from the plan, you're hit with immediate income tax on the withdrawn amount, and a 10% penalty. So if you're in a 15% tax bracket, you'd have to take out $16000 to get the $12,000 to pay off the credit cards - if you're in a 25% bracket, you'd have to take out over $20,000. The threat of home foreclosure to take out funds doesn't avoid the taxes or the penalties.

And depending on where you live, there could be additional state and/or local income taxes on the withdrawal.

Taking a loan against it might be a much better option. That way you're not hit with the immediate taxes and penalities.

From IRS Pub 575 under "Tax on Early Distributions": "Exception for qualified plan, 403(b) plan, and government plan loans. At least part of certain loans under a qualified employee plan, qualified employee annuity, tax-sheltered annuity (403(b) plan), or government plan is not treated as a distribution from the plan. This exception applies only to a loan that either:
Is used to buy your main home, or
Must be repaid within 5 years.

"If a loan qualifies for this exception, you must treat it as a nonperiodic distribution only to the extent that the loan, when added to the outstanding balances of all your loans from all plans of your employer (and certain related employers) exceeds the lesser of:
$50,000, or
Half the present value (but not less than $10,000) of your nonforfeitable accrued benefit under the plan, determined without regard to any accumulated deductible employee contributions."

OK, since it sounds like you already own your home, that says you'd have to pay a loan back in five years to avoid tax consequences. But what are you paying now just in credit card interest, close to $3000 a year? That would cover paying off the loan. And if you're paying anything at all now on the credit card principle, there's some more money that could be freed up for the loan repayment.

If you take a loan against the 401K, things are going to be tough the next five years. Not worse than now, but not easy. But at the end of that time, you'll get the equivalent of a nice raise (won't have that payment to make any more) plus will still have the 401K money invested toward retirement.

If you just take it out, OK, you make the next five years easier, but make retirement years a lot harder. The money you'd take out should grow to a very large sum by the time you and he retire.

If the employer's plan allows, it's your choice. And it's pay-me-now or pay-me-later. There's a lot to be said for biting the bullet now, getting everything paid off, then in another five years things get a lot easier. Don't mortgage your future if you can avoid it.

Good luck.

Answer 5

You could take out a loan against your 401k, but you would have to pay it back in 90 days with interest. Generally, it's never a good idea to touch your 401k.

Try transferring the debt to a card that has 0% interest on balance transfers.

Answer 6

Hi Chris you can't borrow your way out of debt ..Write down all your debt everything.. Those so called consolidation companies are losing their non profit status with the government.. I don't think student loans can be part of this anymore ,,but take all your debt information to a lawyer and declare bankruptcy..Get out your mess and forget about it .. Start a new and spend only the money you earn..

Answer 7

Just stop contributing to it, and pay off your debt from that money that you were contributing to it. Sorry, no loophole, and thank goodness!

This $ is for retirement.

You can't get money out unless you have a hardship, or leave your job. Then you'll get a penalty and pay taxes on the withdrawel. To be honest, you may have to withdraw almost the entire 48k to pay off the taxes, penalty and CC debt. How does that strike you?

Answer 8

What do you have to show for your $120K? Sale some of it off. Using 401(k) money is not wise, since you have to pay interest on the deduction and still replace while losing the existing growth. You need to go to a financial counselor to get a handle on your spending. If you don't stop spending beyond your means, the additional $48k won't do any good.

Answer 9

I did. The only problem is that you have to pay the 10-20% penalty fees in addition to your normal taxes you would have to pay.
I used all of my retirement to pay off most of my credit cards debt.
It went down from $22,000 to $6,000. Now I am down to $3,000. I am paying more than just the interest which helps me to start to have a peace of mind when I finally finish paying off all of the debt.

Answer 10

Check to see if you can take a loan out on the 401k account. Most let you. And you pay yourself back weekly, paycheck to paycheck. And best of all the interest you pay yourself.