Does it make sense to borrow against my 401K to pay off a debt?

Question

I was told that it is possible to borrow money from my pension plan to pay off debt. I was under the assumption that you could use 10K for a first time homebuyer and not be taxed or pay out penaties. Does anyone know about this sort of thing. I am also not sure if it is a 401K but it is a pension plan. Does it depend on my company?

Answer 1

Depends upon the type of 401K and how it is structured. Check with the administrator of whatever company holds the 401K for you and have them explain whether or not you can do that. There are restrictions for use of money withdrawn from a 401K (usually to buy a home) and there are penalties, too. In the long run it might cost you much more than the original amount of the debt.

Answer 2

NEVER.
1) BORROWING is not paying off debt. It is renaming debt.
2) The return you are currently earning on your 401(k) is probably double the rate you will pay back into the account.
3) WHEN you leave the job (you will), your 401(k) loan is payable IN FULL in 60 days. When you don't have the money (you know you won't) you are charged a 10% early withdraw penalty AND pay income taxes on the balance due.

Answer 3

I would recommend that you roll over you 401k (depending how much you want to take) to and IRA. Because if not you will be penalized (usually 10% plus taxes for taking money out) It should be worth it because either way you will have to pay taxes or penalty fees. Plus you will have to use whatever you take and claim that on your taxes as an income and that can hurt you too.

Answer 4

Taking a loan from your 401K to pay off a debt is not to bad of an ideal. When paying your loan back (with interest) you are actually paying yourself back....again, with interest. You are getting rid of a debt that is no good to you.....So, sure, good idea