Have you ever heard of using your 401k plan to get out of outstanding credit card debt? I know that for many debtors this is a completely new concept. This is such a strategy where you try to trade bad amount of debt for good amount for debt. Though this is not the best way to shed off your debt, many debt-burdened individuals have tried this before. Let’s scrutinize this method to know how this can help you to eliminate your credit card debt.
If your 401k plan allows you to procure loans, then you may try and get up to 50% of your normally vested account. However, you should note that you have to repay the loan within a maximum of five years from the time you are getting the loan. However, if you are borrowing for your first home, a longer payback time is allowed.
The pros of this method used to prevent credit card debt.
- There is no credit check at all
- The interest rate is extremely low
- In a situation when you are required to pay yourself, this provides good return
- The whole interest is tax-free as you only pay taxes on the interest upon retirement.
- It is an easy way to avail loan to wipe out your credit card debt.
The cons of this approach
- You lose the interest which would otherwise end up in your retirement account
- You need to repay 401k debt with after the tax dollars
- All your future withdrawals will be taxable
- You will incur 10% credit card debt penalty plus taxes if your age is less than 59
- Since it is a consumer loan, it is not tax deductible
- Practicing this more than once may jeopardize your retirement
Again, this is most likely not the best method to resolve your credit card debt. However, if you are determining to borrow from your 401k, consult with a professional as a professional can help you handle these kind of issues more reasonably. Lastly, understand the consequences of such an approach before you opt out.