I do not make enough money to pay off all my debts in one -two years. In total, my credit card debt is $4,400. I rent, and have no savings except for my 401K.
Would it be smart to borrow from my 401K?
2007-06-23 06:52:25 · 7 answers · asked by Rosseau 2 in Business & Finance ➔ Personal Finance
Borrowing money from your 401k is always a terrible idea. The money in your 401k account is tax-free money. If you withdraw that money you will pay a hefty tax penalty, and if you borrow against it you will be paying back that loan out of your taxed earnings. Either way, you lose because you would be paying more taxes and making yourself poorer in the long run. Do you understand this? Do you see why it doesn't make sense? You may think that it works to your advantage to be paying interest to yourself, but it doesn't really work to your advantage because instead of owing the credit card companies the $4,400 you now owe that money to your 401k, and the tax-free advantage you had with the original funds is lost.
A better way to get rid of that credit card debt is to just stop using the cards and gradually pay them down by significantly overpaying the minimum payments each month.
2007-06-23 16:54:10 · answer #1 · answered by webhead28 6 · 0⤊ 0⤋
You probably can't borrow on your 401K. Withdrawing will cost you your tax rate plus 10% penalty so to get 4,400 you would need to withdraw at about 7,000. If you can't pay off your debt in 2 years how can you pay back that 401K loan or withdrawal in 2 years?
If you do borrow and leave your job for any reason the loan is due or it becomes a withdrawal just when you can least afford the extra tax and penalty.
Working a second to third job bringing in just $200 a month will pay off that debt in under 2 years since you are already paying the interest on the debt.
2007-06-23 07:04:38 · answer #2 · answered by shipwreck 7 · 0⤊ 0⤋
NO! NO! NO! NO! NO!
PLEASE!!! NO!!!
This is a very expensive way to pay off your debt - especially only $4,400 worth!!!
Here are my reasons for hollering "NO!" :)
1) If you would happen to leave your employer OR be "let go", this loan will convert to a distribution if you do not immediately repay it in full. This will be penalized as an early withdrawal PLUS you will have to pay the taxes this year!
2) You will repay yourself at a 7 - 8% interest rate while forgoing higher potential returns!
By the way, if you paid $200 toward your debt every month, you can be debt free in less than 2 years. You can deliver pizzas 2 evenings a week and earn more than $200!
2007-06-23 07:07:10 · answer #3 · answered by Anonymous · 0⤊ 0⤋
As mentioned above, taking a pre-qualified distribution of your 401K is not very wise. However, if you have to in order to pay off a very high interest credit card loan, then you may consider borrowing against it. Some employers allow this AND the interest that you pay for the loan, goes back to the 401K. Check with your employer on this to see if you have this or other options. It's much better than taking the 10% penalty. I won't give you the lecture on how important it is to save and pay off credit cards immediately. Good luck! ---
2016-05-18 03:15:09 · answer #4 · answered by Anonymous · 0⤊ 0⤋
Taking money out of your 401k is probably a bad idea. A lot of this depends on whether you are retired or not though. $4400 may seem like a lot but it isn't.
If you are say 30, that 4400 could be 44k by the time you retire, but it would probably cost you closer to 5500 to have the money needed to pay off the debt. (these numbers are totally arbritrary. I cannot calculate the actual numbers based on your information, nor am inclined to.)
The 'better' plan would be to critically analyze your income and spending. Identify what the minimum amount that you *must* spend and begin applying the excess to one of your credit cards. (Pay minimums on all others and don't buy things you don't need.) When you have paid that off, start with the next one.
Some people will tell you to start with the one with the lowest balance. Others will tell you to start with the one with highest rate. Both arguments have merit, but reality is that you have to calculate which one is/will cost you the most in interest over the given time period. (If you have a card with a 1000 balance and 9.9% and another with 1100 and 19.9% interest it wouldn't be beneficial to pay off the 1k first.) The most important thing is getting your spending under control while beginning to pay off these expensive debts.
2007-06-23 06:57:06 · answer #5 · answered by John T 6 · 0⤊ 0⤋
It depends, you pay a penalty of 10% for early 401k withdraw, and, taxes...so, if your debt is $4,400, the calculation would work like this...if you pay 10% on your debt, you pay $440 on your debt per year, double that if it is in credit cards with 18.5% annual rates. You would require to remove $6,800 from your 401k, to equate $4,400, after taxes and penalties, $6,800 = $4,400.
If your interest debt payment exceeds your profit on the $6,800 annually, you shoule pay off your debt, if not, you should NOT pay off the debt. If you make 10% on your $6,800 annually, you make $680 a year...does this exceed the amount of interest paid on your debt?
Bottom line is, never take long term assets to pay off short term debt!. However, you the guide above to make your determination.
2007-06-23 07:05:29 · answer #6 · answered by Anonymous · 0⤊ 0⤋
no don't do that you. don't take out of your retirement fund, doing so will obviously give you less to retire on. instead try not putting as much into the fund and pay your debt off that way
2007-06-23 07:01:54 · answer #7 · answered by Dominic 2 · 0⤊ 0⤋