02 Aug Should You Borrow From Your 401K To Pay Off Credit Cards?
To borrow or not to borrow from the 401(k) plan to pay off credit card debt, that is the question. The answer to this question will have to be decided by the individual. The decision depends upon the amount of debt you’re carrying, the amount in your 401(k), and the type of person you are.
If you are carrying $30,000.00 in credit card debt at 20% interest and have money in your 401(k) plan that can be borrowed against to pay off that debt, you have to decide what the best use of your money.
I consider myself to be a pretty well-informed person, but today I thought about whether people should listen to the financial gurus and not touch their 401(k) plans when they are carrying credit card debt with exorbitant interest rates.
My thoughts took me down two roads. Before heading down those roads, if you are carrying credit card debt, I would want you to get out of it any way possible.
If you have the ability to pay it off, just do it and you will immediately begin saving money on the interest that you are no longer paying to the credit card companies.
For individuals who can pay off their credit card debt from savings, I must ask why are you reading this blog and why are you carrying debt on credit cards?
For the rest of the normal people out there, another option could be bankruptcy. For those of you who may be considering bankruptcy, please see a qualified bankruptcy attorney.
If you are not going to file for bankruptcy and you have a 401(k) plan that you can borrow against, you may want to consider borrowing from your 401(k) to pay off the 20% interest credit card debts immediately.
After this is done, you can begin paying yourself off (paying back the 401(k) loan) with a reasonable interest rate 5% to 6%. Now, this advice is not gospel and you should investigate this method of repaying your debts prior to jumping right in because it is not for everyone.
You must be a very disciplined person who is not going to tap back into the credit cards no matter what.
Second, you must realize that you need to pay off the 401(k) loan as quickly as possible as well to prevent potential income tax liability. Third, you cannot cancel the credit cards because that would have a negative effect on your credit report.
For those of us who prefer the conventional wisdom of the financial planners, and who want to keep their money safe in the 401(k), I understand your concern, and I am right there with you. I wouldn’t want to see anyone jeopardize their retirement with the amount of uncertainty facing Americans today. Additionally, please note that the money in the 401(k) plan is 100% exempt from creditors in Florida. So, you can say that the pendulum swings both ways in this scenario.
This is why I argue that this is a very personal decision. If I were in this situation, I would borrow from the 401(k), and I would have a hard time sleeping until I paid off the 401(k).
My reasoning is simple: I hate paying interest on anything. I would rather go without something than pay too much for it. But that is me, you may feel differently.
Life is too short. Make a decision and go with it.
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