401K Loan

The only drawbacks are if you are fired you must pay it back before termination or you are subject to the early withdrawal penalties.

The other drawback is if you run up the credit cards again you are a lot worse off than you were to begin.

I think it's a good plan if you cut up the cards.

Interest rates are at an all time low right now, so another option is to take a cash out loan on a paid off vehicle. For instance, If you have a paid off $10,000 car, you could take a loan against it. I'm seeing rates are as low as 1.9%. 2.74% is pretty common right now. Use that to pay the credit card debt off and you will still have the 401k loan available as a saftey net in case something serious comes up.

There are two downsides to 401(k) loans.

1) The money in your 401(k) was put there pre-tax. When you repay a 401(k) loan you pay with after-tax money. When the money comes out at retirement, you will have to pay taxes on it again. Essentially, you pay taxes twice on the same money.

2) By reducing the amount in your 401(k), you will be reducing the amount that is earning interest. The compound effect over 30+ years can be dramatic.

You are right that there are no taxes or penalties for a 401(k) loan withdrawal. The problem, though, is that by paying back your loan at only 3.5%, the 3.5% "earnings" on the loan amount are a lot less than what the market is doing now. In the year ending 3/31/2012, the S&P 500 had a return of 8.54% - so by taking out your money and paying back at only 3.5%, you are losing out on the market gains that the money could potentially earn by leaving it there.

Some could argue that this is an academic argument because the reality is that you are losing money in either case by having debt accruing at such high interest rates, but it is a consideration.

Another consideration is that 401(k) loans are typically structured to be paid out over 5 years. I don't know of any plans that allow you to choose a shorter repayment period, so make sure that's an option before you commit to something that's going to drag out for 5 years instead of the two that you plan on. Of course, there is that problem of what would happen if you were to lose your job - you either need to pay it all back in full or take the tax hit on the withdrawal.

The other concern that I have is that if your 401(k) available loan amount is only half of your credit card amount, that means that your total retirement balance is about the same as your total credit card balance. At age 30, that either means that you have WAY too much credit card debt or WAY too little in your retirement account. A good retirement account balance at age 30 is around $100K. If you're nowhere close to that, you need to save a lot more, now.

If I were you, I would sit down and come up with a plan for the next 2-5 years. Dave Ramsey or Suze Orman's books can help with this. You need to first make sure that you're not adding to your cc debt and can live on your monthly income without accruing more debt. This usually means building some emergency savings. This way, if you do decide that it's worth the interest savings to borrow against your 401(k), you won't find yourself with thousands of dollars in new cc debt in a couple of years - what usually happens to our plan participants with 401(k) loans is that they pay off one loan and then take another, and another, and another. NOT the way to save. You then have to look at what's left after you pay your basic bills and come up with a strategy to build retirement savings and become debt free. If your company matches your contribution, the tax savings on your contributions plus the company match could yield a return on your investment that far outweighs even high CC interest (if you employer matches 50 cents on the dollar, that's a 50% return on your investment above and beyond what the market does) so if possible, you want to at least contribute enough to get the full match.

Then everything else should go towards CC debt - like you, I am a fan of paying off the highest interest rate first. Mint.com is free financial personal finance software that has a nice CC debt goal calculator. I'm happy to say that we're a year from being debt free and it will have taken about 30 months to get there when all is said and done. In a way, the pain of doing it month by month instead of something like a re-fi or 401(k) loan is helpful in changing your spending patterns. For my husband, seeing the statements month after month after month is finally getting through to him that $15K in cc debt takes a LONG time to pay off and it isn't worth it to spend more than we make. Just taking a 401(k) loan and having that amount deducted from my paychecks would not have the same impact for him.

No. I would NOT jeopardize my future retirement for a flash in the pan.

You are in essence borrowing from P. to pay Paul. Cut up the credit cards. You want the easy way out. This is NOT the easy way out. You aren't paying the whole debt off, just a portion. Doesn't make sense.

If you decide to borrow against your 401K, however, you don’t have to pay taxes or penalties on the amount withdrawn (depending on which 401k plan you hold); you simply have to continue to pay interest on the loan until you are able to pay it back. You lose the money that your 401K would have accrued during that time period, but your bank book doesn’t take any further hits as long as you pay it back within the time allotted.

The danger of borrowing against your 401K is not related to the interest you incur because all interest paid on the loan goes back into your account. The risk lies in the potential of losing your job or switching jobs to another employer. When this happens, the clock automatically begins ticking down to sixty days, at which point you must repay the loan in full. If you don’t, the loan you took out against your 401K will be considered a withdrawal for tax purposes and you will have to pay all of the penalties associated with such a maneuver. How stable is your job?

it's really easy for people to say "I've got 30 years" but that time FLIES by fast and other things crop up and the "round to it" well, it's gets pushed back further and futher.

Get your financial life in order. Stop using credit cards. Pay them off yourself.

NEVER borrow from a 401K!!!

http://www.daveramsey.com/article/hands-off-that-401k/lif...

ETA: You might want to consider suspending funding your 401K for a year and pile THAT available money onto the cc debt.

No borrowing from your 401. This is taxable income, and you will have to pay penalties.

The one thing that may be a problem is that if you leave that company or get fired from it you have to pay back the loan in full right away. So you have to think about how likely you are to stay with that company for 2 years, how secure your job is or if could pay that money back as a lump some some other way if you needed to. But in my mind it always makes sense to pay the least amount of interest and we all know that credit card interest is way too high. Also, you have to be confident that you don't cave and put more stuff on the credit cards. That's probably the most important thing to consider.

I'm not totally sure, but I think you might have to use the loan as earned income on your taxes for 2012 and the irs will charge you 10%, plus it might throw you into a higher tax bracket.
I'm sure someone more savvy than me will give you the right answer tho.

um...your only going to be able to pay half of your Credit card debt...makes no sense to do this...lets just add another form of debt to the load...

You say this will never happen again...I must say your idea here shows me that it will...you have not learned enough about finances to be able to work towards a better place.

A 401k should not be used like a savings account or a bank. This money was put there for a purpose and should remain there for a purpose. As a general rule you should never take a withdrawal or a loan from a 401K unless it's for a severe hardship.

What happens if you don't get a paycheck (unemployment, illness) and can't make the 401k loan payment? Then you will have to pay taxes and penalties.

You're already in enough debt, don't make it worse.

There is a bigger issue here... Before you take any loan for any reason you need to cut the credit cards up or you will have more credit card debt plus a loan to payback. That is how it works for most people. You have to break the debt cycle.

Debt is evil

You are so young to have that much debt, you'll need to make changes and get used to having a little less until you are out of the cycle. It takes a lot of self discipline and delayed gratification to make it work.

We believe in delayed gratification and that is how we have taught our daughter. Basically,,, if you can't pay in full right now, you don't buy it. We do use 1 credit card and it is paid in full plus more every month. We use it for our business and run expenses through it.

As for the 401K, make sure you read ALL the rules. Sometimes there are some loopholes and you need to be aware of everything. For instance... if you leave your job.... it has to be paid back in full (in a lot of cases).

It is great that you have the 401K and you should put the max into it but don't think about it as paying yourself back. Yes, it is paying yourself back but on THEIR terms.

One part of your question states that you are only paying off credit cards with highest interest... this makes it sound like you have other credit cards sitting out there to be paid as well. You need to cut them ALL up and pay off ALL of them as soon as you can.

You also have children to get through college so you don't need credit card debt.

Good luck to you on becoming debt free. It is hard but it is worth it.

We have just done this exact same thing. But, we got rid of our cards. No point in doing it if you're going to continue to use your cards. Be careful! You don't want any regrets.

I'm with Cheryl O. If you can't cut them up and absolutely get by without using any credit at all, then you can't even CONSIDER something like borrowing against your 401k.

I'm not saying that you are "most" people, but most people, if they borrow to pay off their credit cards, continue to run up more debt on the very same cards. It just digs a bigger hole.

But of course, there are still other factors like the other ladies have mentioned: tax/penalty ramifications, how long until you expect to retire, the stability of your current employment and income, etc.

I agree to look up pay off debt book/class (like Dave Ramsey or Suze Orman) and just see what they have to say. You might find that the risk/reward is higher to start eating "rice and beans, beans and rice" and cut up the cards altogether.

In all honesty, what you are talking about doing is trying to pay off your debt without pain. And that never works. Because it fails to address what got you into debt in the first place. You need a little bit of pain in this process to help you change the habits that landed you here.

Check to make sure you won't have to pay taxes on the loan from the 401K...if so.. you will need to figure that into your numbers as well.

I don't know your age. I do know that taking from your 401K there are specific guidelines. Contact your 401K manager and tell them what you want to do with the money....

Personally? I wouldn't do it. Why? Because if I can't control my spending on credit card debt - why would I use my retirement money to pay it off? Especially since you aren't able to pay the whole thing off. If you were able to pay it ALL off - I'd think about it. But since it's only half- you are still in the same boat. Making payments because you bought things on credit instead of paying cash. And to top it off $60 a month? for me? Not worth it.

I would STRONGLY suggest you go to the library and check out books by Suze Orman or Dave Ramsey and take control of your financial life. Instead of it controlling you.

Call the credit card companies and negotiate a lower interest rate.
Stop using credit cards. Go cash only. If you don't have the cash - will you or your family die without it?
Build an emergency fund and a savings account.

If you think you can pay off your loan in 4 months - then pile the money into your credit cards. Cut those bad boys up and start living within your means. I realize you said you can manage the payments...but look at all the money you are paying to someone else....instead of building YOUR wealth....go cash only. do it yourself. snowball the debt.

YOU CAN DO IT>

I don't know if it was mentioned already but there could be a stiff penalty if you are unable to make the loan payment. I did this years ago to pay off CC debt. We make quarterly payments and always make damn sure the bill is paid on time. Our retirement guy told us that at some point after you miss a payment then the IRS will act as though you're withdrawing the money, so you'll get slammed with taxes.

I think you're plan is a good one otherwise. Especially since you're done making more debt. If you afford it pay the max every month to get done with it that much sooner. Dave Ramsey's book did a lot to give us some direction with our money.

My only thought - can you keep the debt OFF the card once you pay it down?

I have a gf that does this exact thing at least once every 2 or so years. Her cards get out of control - she takes a loan on her 401k - pays off the card (or a sizable portion) then proceeds to charge it back up - cycle repeats.

If you are good enough with money to be sure you won't fall down that path then I say go for it. But make sure you are being honest with yourself.

I would not touch the 401K. What happens if you lose your job? Its only 4 months your talking about not 4 years. Just keep doing what you have been, you;ll get the debt paid off. Every time one card gets paid off, you can breathe that much better.

There are loans that allow a shorter period than 5 years, it depends on who holds the 401k. I've actually done this twice; once to pay taxes when dh's prior employer reported his income wrong and we got hit with a huge tax & penalty bill, and once to pay off cc's. Once was for 2 years, the other for 3 years. Both times it worked well. Jo W and Katie H both hit the nail in the head. If you're willing to sacrifice the gains you would have gotten if you'd left the money there, you are secure in your employment, and you don't use the cards again it's a viable option for you.

I personally would not touch the 401K. I think a better option would be to transfer the debt to a credit card with an introductory rate of 0%. I don't know about you, but I get these offers in the mail all the time. When the time period is up, transfer to another one. The transfer fee is usually fairly nominal. Good luck.

Ditto JB - great walk through!!

Making a problem more complicated rarely makes it easier, as you add complexity, you add the risk of more things going wrong - and greater risk to your family finances.

Four months and maybe a few hundred difference in interest isn't worth the risk.

Think of it like insurance for your life - Livelihood Insurance.

You can't buy it anywhere, but it's the cost of making the right financial move to protect yourself.

Buying a house? Make the payment affordable on ONE salary. Might have to save more or take longer - but that is the ***cost*** of Livelihood Insurance. Now if one spouse isn't working, the rest of your financial life doesn't hang in the balance because you can afford the house on one salary! :)

The cost of Livelihood Insurance - here it is those 4 months and a few hundred in insurance. That cost protects your financial future, i.e. your 401k.

You said that the loan would pay off 1/2 of the cc debt. So, to the money you would pay each month on the 401k loan, you also have to add the money you will be paying out on the 1/2 of the debt that the loan didn't pay off. So now you have the 401k loan AND cc payments.

If you can swing both, then okay. I'm all for paying less interest!

My husband and I took a loan out from his 401K and actually we are pleased with this move. We were able to pay off a second mortgage and we pay OURSELVES back and NOT the bank/cc company. It was a 5 year plan to pay ourselves back. If you feel you have job security and trust yourself, then do it. So far about 2 1/2 years into it, we are still pleased with our decision.