Borrowing from 401(k)?

[whyzee429]

I'm in my late 20s with a CC debt of $5500 with an apr that is high due to my early CC years of mistakes. Does it make sense to borrow from my 401(k) to get this card paid off so that I'm not struggling to make a dent in the balance each month?

 

[Bootstrap]

If you can't borrow against your car/house..

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[kuyatwo]

It is not good to borrow against 401k

1. If you get let go from the job you need to pay off the loan you can not continue to make payments

2. You are paying back the loan after tax

3. Since economy is down the shares of 401k are devalued so you are taking a loss.

4. You are paying Paul to pay Mary the money taken out from paycheck to payoff 401k loan instead you could put straight to pay cc

5. If it is straight withdrawl their is a huge penalty plus you need to claim it as income on your taxes

6. To improve your credit you will need to show payment history that you mane payments to the cc to lower the balance


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[lawnman]

It is not good to borrow against 401k

1. If you get let go from the job you need to pay off the loan you can not continue to make payments

2. You are paying back the loan after tax

3. Since economy is down the shares of 401k are devalued so you are taking a loss.

4. You are paying Paul to pay Mary the money taken out from paycheck to payoff 401k loan instead you could put straight to pay cc

5. If it is straight withdrawl their is a huge penalty plus you need to claim it as income on your taxes

6. To improve your credit you will need to show payment history that you mane payments to the cc to lower the balance


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+1 and if you straight borrow against it the tax you will pay is your personal tax % and a 10% penalty because you are not 59 1/2. My personal tax % is 29% so add the 10% and I would pay 39%. So that is 390 dollars for every thousand in taxes. If I do a loan against my 401k the loan rate is around 5%.

 

[whyzee429]

It wouldn't be a straight up withdraw, I would just be borrowing. Clearly, I need to look further into all the numbers and percentages. It just seemed like an easy way to eliminate a high rate CC while the trade off was paying an extra $30 towards paying back the 401(k)

 

[capysolo]

It wouldn't be a straight up withdraw, I would just be borrowing. Clearly, I need to look further into all the numbers and percentages. It just seemed like an easy way to eliminate a high rate CC while the trade off was paying an extra $30 towards paying back the 401(k)

It makes sense, you are young enough that it won't matter much. If it helps you out, do it.

 

[capysolo]

Just be smart about it. Don't pay off your cards, and fill em right back up again. Seems like common sense, but that escapes people at times, especially with money... Everyone will have a different view sooner might think you're stupid for even thinking it, but in the end, it's your money. Don't let people tell you what to do, just take into consideration their advice.

 

[jcdeng]

no, don't do it. If your apr is that bad, consider taking a personal loan at the bank at around 12% interested and do it that way. Thats what I did when I first got out of college and 12% is way better than my cc's 24%, and I had 17000 debt back then.

 

[Kawicivic]

This is a good option in certain cases. You are young so you probably have not taken a hit on your 401k like others so you are not "losing" by taking that money out. Obviously paying off your CCs with extra money and contributing to your 401k is ideal. I am not the best with my money and don't function well on limited income. By taking a loan and paying off my CC I have my payments automatically deducted from my paycheck and the only fees that are paid were for the origination of the loan. All interest goes back into the account. So yes, I lose that money for investing, but I also lost the 20% interest that I was paying on my college "free pizza or tshirt" credit card.

Another thing that I did when I did this was up the amount I put into my 401k. Since my repayment was smaller than my CC payment each month, I added some back into my 401k. This allowed me to start saving more and it might even allow me to end up with more money even though I am taking money out up front. I won't ever put in less, so this addition boosted the amount into my 401k forever.

I agree with others about penalties, only do something like this is a positive outcome and not a quick answer. Don't pay hundreds of dollars in penalties when you would pay the same in interest over time. Look at all the costs and make an educated decision. The fact that you are thinking about this means you probably can easily figure out which decision is correct.

 

[1fishmonger]

There's some good advice up there. Just be glad its 5500 and not 55,000. My preference is to pay off CC balances in full each statement period. Helps force you to live within your means and not over extend yourself... Debt is a slippery slope - Keep it in check early.

 

[Kawicivic]

There are different types of loans and rules depending on the 401k account. Many people told me not "because that is your saving and you never take anything out of it" - if that is the only thing they can say as a reason, then disregard it. General rules are great but if you can measure a specific set of circumstances and make an educated decision then there is no reason not to do so. I think the "don't ever touch your 401k" is a great general rule, but its simply a guideline in most cases. Don't use it to buy a car. Don't use it to purchase your dream fish tank. If you can come out ahead on interest and be disciplined enough to end up in a better situation at the end, there is no reason not to.

 

[whyzee429]

All you guys and girls are being very helpful and I appreciate it. I'm reading everything that has been said and I'm not disregarding anything.
A guy at my work borrowed 6k from his. The way he described it to me was that the money is being borrowed from John Hancock and not his actual account...unless he defaults. His loan is set at 5.9% and there is apparently no penalty. This is all essentially new to me, but does that seem right?

 

[capysolo]

All you guys and girls are being very helpful and I appreciate it. I'm reading everything that has been said and I'm not disregarding anything.
A guy at my work borrowed 6k from his. The way he described it to me was that the money is being borrowed from John Hancock and not his actual account...unless he defaults. His loan is set at 5.9% and there is apparently no penalty. This is all essentially new to me, but does that seem right?

My loans come out of my account. Not sure they actually remove money or anything, but whatever you take as a loan is not used for investments. However, with my plan, any interest gets paid back to my account, somewhat offsetting the investment loss (not a ton, i know). The only fees i pay are a small setup fee, and a smaller annual maintenance fee.

Keep in mind, ANY loan or monthly payment is after taxes... The lowest interest rate would be the best. Keep adding to your 401k! No matter what! Better to take a loan out to pay some debts, but be able to put more in.

 

[steamer51]

kuyatwo said "1. If you get let go from the job you need to pay off the loan you can not continue to make payments" and this is a very important consideration. My last employer decided to close the plant where I live and send the work (not the employees) to their other plant in another state so we were all laid off. One of my friends had a 401K loan of over $5000 that he did not have the cash to pay off due to no job. That became a regular dispersement with the 10 percent penalty and income taxes owed. Losing your job with little notice is not uncommon in the present economy. Taxes and Healthcare encourage companies to get smaller not expand.

 

[capysolo]

kuyatwo said "1. If you get let go from the job you need to pay off the loan you can not continue to make payments" and this is a very important consideration. My last employer decided to close the plant where I live and send the work (not the employees) to their other plant in another state so we were all laid off. One of my friends had a 401K loan of over $5000 that he did not have the cash to pay off due to no job. That became a regular dispersement with the 10 percent penalty and income taxes owed. Losing your job with little notice is not uncommon in the present economy. Taxes and Healthcare encourage companies to get smaller not expand.

But if the OP were to lose his job now(lets hope not), he would still owe the credit cards... Where as with the loan, you'd get hit with the penalties, but would not have the monthly bills of the cc...

 

[Nicks387]

You should see if you can get a low introductory rate on a transfer to a new card, or to a card you already have that has a zero balance, if you have other cards with low balances try and call them to see if they would be willing to offer you a low rate on a balance transfer, if your credit is good that is, and you can get a new card. It may be possible to get a 0%APR on balance transfers to a new card for up to a year in some cases, try and get it paid off during this APR and if you have any balance left at the end of the year, try and transfer that again to another card. I have done this many times to pay off balances with very low to no interest. Make sure to make on time payments obviously, or the intro APR vanishes and you get hit with a default APR that can be real high. Good luck.

 

[whyzee429]

Decisions decisions :/

 

[kuyatwo]

Do you own a house depending how much you owe so a home equity loan interest rates are so low.


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[WesF]

I'm going to disagree with some of the advice and say that a 401(k) loan is better than carrying a balance on a card or a personal loan for the following reasons.

1). There is no tax penalty as long as you continue to make your payments and pay it back.

2) You are paying yourself back with interest. The interest does not go to a bank.

3) you don't actually sell stock. You are just not earning on that money until you pay it back. This is why you pay yourself back with interest.

4) stock market is in good shape right now. You would not be "selling low" so the chances are you won't be missing out on alot of potential earnings for a few years.

5). If the stock market drops while you are paying back your loan you actually protected your money from a loss.

 

[capysolo]

I'm going to disagree with some of the advice and say that a 401(k) loan is better than carrying a balance on a card or a personal loan for the following reasons.

1). There is no tax penalty as long as you continue to make your payments and pay it back.

2) You are paying yourself back with interest. The interest does not go to a bank.

3) you don't actually sell stock. You are just not earning on that money until you pay it back. This is why you pay yourself back with interest.

4) stock market is in good shape right now. You would not be "selling low" so the chances are you won't be missing out on alot of potential earnings for a few years.

5). If the stock market drops while you are paying back your loan you actually protected your money from a loss.

Sounds like you are AGREEING that a 401k loan would be better than a personal loan or carry credit card debt...