Posted on: 24th Apr, 2007 12:35 am
I have around $25,000 in credit card debts. Should I use my 401K money in paying it off? The total amount that I have in 401k account is $40,000. I am behind on any of the payments and wish to get rid of the debt as early as possible.
Welcome Abbey.
If you are thinking of taking out money from your 401K account, be prepared to pay the taxes on the amount withdrawn. This is because when you cash out your 401k plan account, you need to pay taxes. And, if your age at the time of withdrawal is below 59 and 1/2 years, you will also have to pay a 10% penalty on the contribution.
Once you take out cash from the 401k account, you cannot deposit them again. As such, I feel you can take out a 401k loan if your company allows for it.
As per the laws, you can borrow up to half of the money deposited into your account or $50,000 whichever is less. The repayment period is generally 5 years and even longer if the loan is taken for a house. But check out the interest rate on the 401K loan from your employer.
Know more about 401K loan from a section on this topic.
Thanks.
If you are thinking of taking out money from your 401K account, be prepared to pay the taxes on the amount withdrawn. This is because when you cash out your 401k plan account, you need to pay taxes. And, if your age at the time of withdrawal is below 59 and 1/2 years, you will also have to pay a 10% penalty on the contribution.
Once you take out cash from the 401k account, you cannot deposit them again. As such, I feel you can take out a 401k loan if your company allows for it.
As per the laws, you can borrow up to half of the money deposited into your account or $50,000 whichever is less. The repayment period is generally 5 years and even longer if the loan is taken for a house. But check out the interest rate on the 401K loan from your employer.
Know more about 401K loan from a section on this topic.
Thanks.
Abbey, you can also minimize your contribution to the 401K. You may contribute as much as is required to match the employer's contribution. However, if there isn't any match, consider stopping your contribution and use the money to make extra payments on the cc debt. Also, try to find out why you have been lagging behind on the credit card payments. I am saying because this will help you to analyze your finances and be current on the loan.
Havens NO! Your 401k is meant to be your nest egg when you retire. I can assist you to access the equity in your home if you're currently a home owner. This would allow you to consolidate your debts and get rid of the debts ASAP. This would also leave your 401k untouched. If this sounds like something you would like to consider, you can give me a call at the numbers listed below.
My name is Will. I am a mortgage consultant with Wells Fargo Home Mortgage. It's a pleasure to make your acquaintance Abbey.
My name is Will. I am a mortgage consultant with Wells Fargo Home Mortgage. It's a pleasure to make your acquaintance Abbey.
Hi Abbey,
The advantage in borrowing from 401K is that you pay the interest back to yourself and not an external agency. This is because the interest keeps accumulating in your account itself.
The demerit is that you may be required to pay the loan in full within 3 months or else you face a loan default, if you are no longer interested to work with the company. As a result, your credit rating is badly affected. You also owe taxes at the highest marginal tax rate.
There is a 10% penalty for early withdrawal from 401K account if you leave the current company (which has been contributing to your 401k account) prior to the calendar year when you will be reaching the age of 59 and 1/2 years.
Good luck
The advantage in borrowing from 401K is that you pay the interest back to yourself and not an external agency. This is because the interest keeps accumulating in your account itself.
The demerit is that you may be required to pay the loan in full within 3 months or else you face a loan default, if you are no longer interested to work with the company. As a result, your credit rating is badly affected. You also owe taxes at the highest marginal tax rate.
There is a 10% penalty for early withdrawal from 401K account if you leave the current company (which has been contributing to your 401k account) prior to the calendar year when you will be reaching the age of 59 and 1/2 years.
Good luck
if you plan on touching your 401K plan, you know there are penalties for it unfortunately,
here is an informative website that just might help you; some good information is available on the clear your debt web site. Just do some reading and see what they have to say, but if i were you i would not touch my 401K ;)
[Email address deleted as per forum rules. Thanks. Sam]
here is an informative website that just might help you; some good information is available on the clear your debt web site. Just do some reading and see what they have to say, but if i were you i would not touch my 401K ;)
[Email address deleted as per forum rules. Thanks. Sam]
Abbey,
My personal opinion is that you should go for 401k loan. If however, your employment gets terminated, then your employer will call the loan due and payable and in that case, you will have to repay it. In case you don't pay down the loan, it will be considered as a distribution and then you'll end up paying taxes on the unpaid balance of the loan.
Thanks,
Jerry
My personal opinion is that you should go for 401k loan. If however, your employment gets terminated, then your employer will call the loan due and payable and in that case, you will have to repay it. In case you don't pay down the loan, it will be considered as a distribution and then you'll end up paying taxes on the unpaid balance of the loan.
Thanks,
Jerry
Abby,
Don't do it! :)
Yes, you will have to pay taxes on the money. Yes, you will need to pay the 10% early withdrawal penalty. Yes, you will be robbing funds from your retirement nest egg.
But the biggest reason NOT to do it, is that you haven't (yet) made any changes to the way you handle your finances. Because of this, once you pay off the credit cards, you will likely just run up more credit card charges. I know because I have done it (many times!!). I have used money from my 401K, borrowed money from my 401K, and refinanced my home mortgage to tap some of my home equity. Each time I used the money to pay off my credit cards. And each time I soon ran up the credit cards again.
The secret is that there is no secret. You can not borrow your way out of debt. You need to bite the bullet and pay off your credit cards with good old fashioned hard work. It can be done. I am working on this myself and plan to pay off $44,000 of debt in 3 years. Doing this really changes how you handle your finances.
In order to achieve any kind of financial success you must live on less than you earn.
I wish you the best of luck and feel free to contact me if you'd like any help or encouragement.
- Finding Financial Peace
Don't do it! :)
Yes, you will have to pay taxes on the money. Yes, you will need to pay the 10% early withdrawal penalty. Yes, you will be robbing funds from your retirement nest egg.
But the biggest reason NOT to do it, is that you haven't (yet) made any changes to the way you handle your finances. Because of this, once you pay off the credit cards, you will likely just run up more credit card charges. I know because I have done it (many times!!). I have used money from my 401K, borrowed money from my 401K, and refinanced my home mortgage to tap some of my home equity. Each time I used the money to pay off my credit cards. And each time I soon ran up the credit cards again.
The secret is that there is no secret. You can not borrow your way out of debt. You need to bite the bullet and pay off your credit cards with good old fashioned hard work. It can be done. I am working on this myself and plan to pay off $44,000 of debt in 3 years. Doing this really changes how you handle your finances.
In order to achieve any kind of financial success you must live on less than you earn.
I wish you the best of luck and feel free to contact me if you'd like any help or encouragement.
- Finding Financial Peace
Very good advice "Finding Financial Peace" :)
You offered that he can contact you if he wished to but how? You haven't given your contact details :)
You offered that he can contact you if he wished to but how? You haven't given your contact details :)
Hi Guest,
Welcome to our forums.
I must agree with you when you say that it's sheer hard work and proper planning that can help one reduce his expenses. In fact, one has to learn how to live on low spending - it's improtant when it comes to paying to paying off debts.
I guess experience is something that teaches a person how to deal with a financial hardship. That's how you could interpret that managing your finances requires hard work just like any other successful task.
great advice guest!
Stay well and good luck :)
Welcome to our forums.
I must agree with you when you say that it's sheer hard work and proper planning that can help one reduce his expenses. In fact, one has to learn how to live on low spending - it's improtant when it comes to paying to paying off debts.
I guess experience is something that teaches a person how to deal with a financial hardship. That's how you could interpret that managing your finances requires hard work just like any other successful task.
great advice guest!
Stay well and good luck :)