cash out 401k to pay off debt

Hi Dndminnich,

You can borrow up to $50,000 or fifty percent of your account balance, whichever is less. This loan will have to be paid off within 5 yrs. & payment is to be made at least once in a quarter. And you will have to pay interest on it though the interest will go back into your own account. Here you are the lender as well as the borrower.

But if you are not able to make payments once in a quarter or pay off the loan within 5 years then a 10% penalty is accessed considering the loan as a distribution from your account. And the money becomes taxable income. So you need to keep these pitfalls in mind before considering borrowing from the account.

Miller

I won't advice you to borrow from 401k.

The reason is you will be giving up tax free compounding of money that you will withdraw which can result in relatively smaller balance left at the time of retirement. And if you leave your current employer due to some reason then may have to immediately pay the loan back or face tax and penalty.

Once I also thought about borrowing from 401k but my financial planner advised not to do so and look at all other options before selecting to borrow from 401k.

I would also recommend you not to borrow out of your retirement plan if other options are available.

Yes, borrowing from your 401k is not a good idea, and you should NEVER cash out your 401k. It may sound tempting even with the penalty and taxes but it's not worth it.

You could always greatly reduce your 401k contributions and use the extra monthly fund from that to pay down debt quicker. I'm not sure how many hours your work now but you could always pick up a second job to help knock out the debt. Just some suggestions, Good Luck.

I dont necessarily agree. Borrowing money from your savings is not all that bad, is that not what savings are for. Think about the state of many of american's 401K over the past few years. Returns have not been all that great, surely 10% or less in many occasions. The interest paid on a 401K Loan is 8.5% or so, much lower than that associated with credit card rates. The money you did borrow will return to your 401K as you pay it back and it will earn some interest. Additionally, the money that is paid back is generally taken directly from each paycheck. Therefore, if you budget accordingly it generally goes un-noticed. I am not a financial planner, yet I have borrowed from my 401K to pay off some deby that otherwise would have been difficult to overcome. I would definately not "cash in" your 401K, you will never save that money again, with the loan it is just that - a loan.

I guess you make a valid point, but I still disagree with borrowing from your 401k. First, it's not real simple to get a loan against your 401k. Many times there are restrictions about borrowing from your retirement accounts. Also, if you are going to have the money to pay back the 401k loan then why not look into some type of consolidation loan or get a loan from a credit union which has a lower interest rate? I'm just not a fan of borrowing from your retirement accounts because it's not what they were designed for.

Well, borrowing from 401k may or may be a good option depending upon why one has to borrow and what's his financial situation. It is true that interest rates are lower than credit card rates but what about the taxes and penalty for cash withdrawn?

dcrum, a consolidation loan has a long term, so even if one makes payment on the loan at a lower rate of interest, in the long run he is actually paying a lot of interest.

I feel if one has to consolidate debts, he may go for debtconsolidation program or may be debt settlement.

Take Care

Well first of all there was no penalty or charges for borrowing "my" money. Since this is a loan there were no tax implications. The payment is payroll deducted (post tax) so there is no tax burden on the loan. As for ease of borrowing, I suppose that depends on your company's plan. I applied for the loan on-line and had a bank check within 5 days. I only had to wait a couple of days for the check to clear at the bank.

All in all, pretty easy process. I do know that if you are borrowing from your 401K for purposes of home purchase, things are a little different (I presume because the interest may be tax deductible).

Either way, say you have 50K in 401K earning low interest due to economy at this time. You have 18K in debt at 21% interest and 400 / mo payments which do you nol good to paying down the debt. You borrow the 18K and pay it back in 5 years at 8% interest that goes into your 401K. The debt is paid off immediately and I would be willing to bet that your payroll deduction (at twice monthly) will be less than the previous $400 payment.

My suggestion, model the loan and evaluate your options. If you are secure in your job this may be a good alternative to paying bills late and being cashed strapped each month.

Hi Guest,

Welcome to the forum.

I think using 401k to pay off your debt is not a very intelligent idea. Because you must pay back the loan within 5 years. If you leave the job then the loan is payable straight away. If you do not make the payment and if you are under 59 year of age then it will be considered as the amount is distributed to you and you will have to pay additional 10% excise tax as a penalty for an early withdrawal of the 401k fund.

Feel free if you have any further questions.

Best of luck,
Larry

iam 53 my job closedup i owe 9754.00 on credit card iam paying 250 dollars amonth interest on it do i cash in my 401k ihave 36000 in it icant pay the interest any more it makes me sick interest to high or should i stop paying the cc i dont care about my credit rating my minim payment is 300 ithink its going up to 600 help iam sick of it

David...you can definitely cash in your 401k in order to pay off the debts. However, this is your retirement account which will help you when you are retired. So if you have other options, check them out first and then decide on taking money from your 401k. If you stop paying the cc, then it may go into collections which may create further problems for you.

I am strong proponent of borrowing from yoru 401K.

Come on guys lets look at all our 401K and see what option we really have to chsoe from.

After after making the right choices, see where it is at today. At least 50% down.

If you can borrow from your 401K to pay your loan at a lower rate thats better than paying high interest rate.

People who are retiring today are in really a bad situation. It will probably take another 10 years to rebuild that lose they experince.

I agree with those who borrow from your 401k, but I think it all depends on your age.. Why not borrow from yourself? It's crazy, you are saving for tomorrow, but what if you die before the age of 59? All that money you saved, means nothing.. Live for today and stop worrying so much about tomorrow..... I am 34 and I borrowed from my 401k, paid it back within 18 months.. If I needed to do it again, I would... I have at least 30 more years of work to go, before I can retire and there is no gurantee that I am going to see 59.

Currentlyhave $197K in 401K. Last March I took $25K of personal non ret income and purchased Ford at $1.25. Thinking of cashing out everything and loading Ford stock. With Toyota going donw, Ford will be #2 possibly #1 before it is over. I figure with taxes and penalty, I can clear $100K and load Ford. Wish I had last March. I would have retired. :(

Hi balasama,

If you cash out everything out of your 401K account before you turn 59 and 1/2, you will be required to pay income tax plus penalty on the amount you withdraw. You will lose a considerable amount of money if you cash out your 401K account early. In my opinion, it is better to leave your 401K account untouched unless you need the money for an emergency.