We have not included all available products or offers. In addition, you will suffer significant losses on your investments by not taking advantage of the compound interest. A 401k is a great retirement savings tool that offers tax benefits, too. “You repay the money back into your 401(k), including paying interest to yourself.”. Why you shouldn't cash out. When determining the value in taking a 401(k) loan to pay off debt, compare the interest rates. 6 Surprisingly Simple Moves To Boost Your Credit, 5 Must-Have Apps That Will Completely Change How We Invest, You repay interest to yourself, putting more back into the 401(k), As long as you meet the terms of the loan, you won’t have penalties and taxes, If you leave your job, you have to repay the balance quickly, Defaulted loan amounts are treated as distributions, with accompanying taxes and penalties, You might not be able to contribute to the 401(k) while you have a loan balance, You miss out on compounding returns while the money is out of your account, If you’re nearing retirement and can’t afford to take the money out of the market, When you see it as a quick fix and don’t have a plan to improve your long-term finances, If you’re unsure of your job security and think you might change jobs before you pay off the loan, Resolve your debt in as little as 24 - 48 months, They've helped save their clients over $2 billion. When you have a high-interest debt, it could be beneficial to cash out a portion of your 401k to pay off the debt. Good to know that 401k loans should only be used in emergencies. Should you take a 401(k) loan to pay off credit card debt? Understand what you’re getting into before putting your retirement security at risk. In addition, many people ask do 401K loans affect mortgage applications or their credit scores. However, to get the best rates, you need to have good credit and you might need to meet other requirements. If you fail to repay it in time, the amount is considered a taxable distribution. If you have a 401(k) plan at work, for example, you may be able to borrow from it with a loan. | Phone: 1 (941) 761-7805. This does not include $127,000 in student loans. If you are no longer with your employer, the IRS may want you to repay the remaining loan amount within 60 or 90 days. Properly done, a 401(k) loan avoids all penalties and taxes. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments. This is the way to gain major momentum as you pay off your debts in order from smallest to largest. When you pay biweekly, this means you pay … Dave Says: Using a 401K to Pay Off Debt? If the debt you would be paying off is credit card debt, you’re probably paying more than 18%. Some companies allow plan participants to borrow from themselves using a 401(k) loan. In other words: Use the $5,000 to pay off your debt now and save $3,274.48. “If you left your job in October 2018, for example, the balance would be due by April 15, 2019,” says Centeno. The EIDL carries a 3.75% interest rate (2.75% for non-profits) which makes it less expensive than other types of unsecured small business financing available now. These allow you to get help with managing your debt and getting rid of it without putting your future at risk. That's why it's important to take this wise counsel from financial expert Dave Ramsey. Using your 401k you can wipe out your debt. By submitting this form you agree to receive emails from FinanceBuzz and to the privacy policy and terms. “It [can sometimes] feel like the only real option for paying off debt.”. 401k Definitions Every 401k Plan Holder Should Know, Borrow Your Own Money? For instance, someone can borrow money from their 401k retirement account and repay within a specific amount of time such as five years of the date of the withdrawal. In many cases, you can borrow up to $35,000 or $40,000, depending on the lender. FinanceBuzz has partnered with CardRatings for our coverage of credit card products. And, it could make a huge difference in the way you live! Typically, the idea of using a portion of the 401k for debt relief is alluring. If borrowers understand the potential drawbacks, this type of loan can provide a sound strategy to escape high-interest credit card balances. Just because there are advantages, though, doesn’t necessarily mean using a 401(k) loan is a good idea. When determining the value in taking a 401(k) loan to pay off debt, compare the interest rates. Are there any expenses you could cut back on so you could put that money towards your debt? Log In Sign Up. Withdrawing money from your 401k to pay off credit card debt is using retirement money — money you’ll need later! You can’t withdraw all you have in the retirement account. However, you might need to fill out more paperwork and go through a more stringent process when you use a debt consolidation loan. This costs me an … Press J to jump to the feed. 3. If you are not eligible for hardship distributions from a 401k and if you don’t want to pay tax penalties, you can take a loan against your 401k. Plus, because of the short time frame, you know you’ll be able to pay off the loan quickly, says Centeno, potentially faster than you would be able to otherwise. The main pitfalls of using a 401k loan to pay off debt is in the risks you undertake. An individual who uses their 401k to pay off debt can incur more debt. In comparison, a second mortgage or home owner’s equity line of credit should have an interest rate of 5% or less. Option #2: Use Your Retirement Account to Pay off Debt . On the surface, these seem like a gift: You can avoid an early distribution, pay off that debt in one chunk, and pay interest to yourself rather than to a credit card company. First, your employer may not let you contribute to it anymore until you’ve repaid the loan. We have $190,000 in retirement savings and want to use the COVID-related distribution rules to pay off $40,000 in debt — should we? Lower Interest Rate on 401(k) Loan. Check with your human resources department to find out how to borrow from your 401(k) and what terms you might be stuck with. The main pitfalls of using a 401k loan to pay off debt is in the risks you undertake. This is especially true when this debt is not tax-deductible. The high risks of using a 401(k) loan to pay off other debt. By continuing to make only minimum payments on the debt, you’re paying a great premium for everything you buy on credit. However, while there are some advantages to dipping into your retirement savings to pay off debt, there are some downsides. They always have a term of 5 years; Payments must be made at least quarterly You could use your credit cards to pay for an emergency expense, cover your regular living expenses after a job loss, or have spent more than you can afford to pay for over a period of time. That's why it's important to take this wise counsel from financial expert Dave Ramsey. From what I understand, we can take the loan out with no tax or early withdrawal penalty, and pay the 401k back each month with interest. If your student loan is at 9%, paying off your loan is like getting a risk-free return of 9% on your investments. Are You Heading for Debt Trouble? Up until now, using a 401k loan to pay off debt you owe to the IRS must seem like a pretty great deal. As a result, many individuals seek ways to repay their student loan debt early. Plus it’ll cost you. When using a personal loan to consolidate, you don’t have to worry about the fact that you could be charged taxes and penalties if you switch jobs or if something goes wrong and you can’t make payments. Tapping your 401(k) to pay off credit card debt might seem like a low-cost option, but its long-term risks are significant. By Dave Ramsey. After paying off your loan in those five short years, you then decide to commit the next five years to put the payments that you used to make towards your student loans ($494) instead towards your 401k, meaning you also receive the company’s offered 3% match ($50,000 x 0.1 = $5,000 + $1,500 = $6,500/12 = $541). Press question mark to learn the rest of the keyboard shortcuts. The American debt situation is overwhelming. But you have to consider 401K loans rules before you apply. We are as secure in our jobs as anyone and don't forsee losing them, though obviously anything is possible. In some cases, you might be better off using other types of loans to pay off your debt, especially if you have good credit. I literally knew nothing about them and thought that with the rates of return vs loan interest rates, I might just be throwing money down the drain (by not paying off debt using a loan that I will just then repay back to myself). carry a lower interest rate than other alternative options. If you take out money before that age, you are charged a 10% penalty and also need to pay the federal and state income taxes. Published: July 11, 2020 at 2:56 p.m. One of the biggest concerns with borrowing from your 401(k) is the fact that you just might not pay off the loan. All advice should be weighed against your own abilities and circumstances and applied accordingly. And to get to the point, it’s not a great financial move because those under the age of 59 ½ are likely to incur a 10% penalty for making a straight withdrawal. Subscribers get Are You Heading for Debt Trouble? What is a 401k loan? “Miss that deadline, and the outstanding amount becomes a distribution and subject to taxes and penalties.”. You can usually get up to $35,000 to $50,000 when consolidating debt, and you might have as long as five years to pay off a debt consolidation loan. If you are not eligible for hardship distributions from a 401k and if you don’t want to pay tax penalties, you can take a loan against your 401k. And that’s not a bad thing. Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. You don’t really pay interest, you can avoid a credit check, and you’ll be able to access the money incredibly quickly. There is no withdrawal penalty on a 401k or traditional IRA if you are over age 59½. Archived. When borrowing from a 401(k) to pay off debt, says Christine Centeno, a CFP and the owner of Simplicity Wealth Management, you’re limited to the lesser of: The exception is if your balance is $10,000 or less. If you have a lower interest rate and you rely on federal protections like PSLF (Public Service Loan Forgiveness) or income-driven repayment, you could lose out by taking money out of your 401(k). You will be subject to a 10% tax penalty on the funds you withdraw. — in order to pay for unsecured debt, from an account that’s usually protected from most creditors. Your spouse’s consent may be taken into consideration before approving the loan. “It can be a smart decision and save a significant amount of interest.”. Additionally, among companies that do offer a plan, you might have restrictions. Using a 401(k) Loan to Pay Off Debt. If you have high-interest debt, taking a 401(k) loan to pay it off could be a good idea. How to Pay Off Credit Card Debt. If you have student loan debt, you know what it feels like to be desperate to pay it off.Millions of individuals in the U.S. carry student loan debt that they took out to pay for their own education or their child’s education. About 40% of working Americans have an employer’s retirement plan. You do need to be aware of the risks, however, especially if you’re not sure you’re going to stick with your current job for very long. By putting your 401k withdrawal toward debt, you may be able to pay off your account in full. Option #2: Use Your Retirement Account to Pay off Debt . Methods to Pay Off Your 401k Loan Faster Make Bi-Weekly Payments. © 1995-2021 The Dollar Stretcher, Inc. | All rights reserved except where specifically noted. Use the debt snowball method. Some lenders, like SoFi, allow personal loans of up to $100,000. However, you need to make sure that you have calculated the interest costs against the penalties you would be paying before you decide to withdraw money from your 401k. A 401(k) loan is what it sounds like — you borrow money from your 401(k) for any purpose, and then you repay it. Should you pay off your student loans using your 401(k) balance? By continuing to make only minimum payments on the debt, you’re paying a great premium for everything you buy on credit. In this case, you’d be required to take out a 401k loan. And that’s not a bad thing. We have $190,000 in retirement savings and want to use the COVID-related distribution rules to pay off $40,000 in debt — should we? Using a 401(k) to pay off a mortgage is possible, but it might not be the most prudent decision. One example of gazelle-intensity-gone-wild is using your 401(k) to pay off debt. A Simple Checklist and What You Can Do About It for FREE! If you are not age 59 1/2, it generally is not a good idea to use your 401k to pay off debt. If you ask me, it’s a bad idea. If you’re relatively young and can make up for the loss of time in the market later, borrowing this type of loan to pay off debt may help you get back on your financial feet — especially if you fulfill the terms and repay yourself with interest. And the best way to pay off your debt is with the debt snowball method. CBN.com – These days it pays to be smart about money. Dave Ramseysays you shouldn’t take money out of your IRA early unless it’s to avoid bankruptcy or foreclosure. That could be a big blow to a saver — especially if you can’t contribute to your 401(k) while you have an outstanding loan. But the key word here is retire. Paying off high-interest debt. I currently pay $548 a month. Why you shouldn't cash out. Carefully consider before you get a 401(k) loan. “In some cases, they make a lot of sense, so they’re worth exploring as an alternative,” says Centeno. ET By “The interest rate on a 401(k) loan is fixed and significantly lower than outstanding credit card interest rates,” says Centeno. You shouldn’t borrow from your 401K, period, much less to pay off your debt. All this can get pretty complicated so you may want to consult with a professional financial planner. So, when you repay, you are not actually adding to your total balance. At age 70 and above you have to compulsorily start taking out money from your 401k. When it comes to paying off credit card debt, there’s no better way than the debt snowball method: Step 1: List your credit card debt from smallest to largest (don’t worry about interest rates). Biweekly is the typical pay schedule. There Are No Restrictions On How To Use A Payday Loan, But You Should Be Cautious And Only Get One When You Have No Other Way To Get The Money You Need Immediately. For this reason, I’m not a fan of using a 401K loan to help you pay off debt. Dear Debt Adviser, I have $15,000 in a 403(b) and a car loan at 4.9 percent that has $14,500 left to pay that matures in November 2013. Dear Dave, Is it a good idea for a married couple in their early thirties, who have a lot of student loan debt, to cash out one of their 401(k)s to pay it off? If you pay a $4 minimum on the $100 debt, then it’ll take you 32 months to pay off the debt (use this hand debt repayment calculator) and in the end you’ll have paid a total of $128 for a $100 purchase. And, you are putting your financial health at risk. Instead of taking out a loan, you could withdraw funds from your 401(k) plan and use them to pay off your debt, but this strategy can be costly. However, this advantage is strongest if you're barely into your mortgage term. Mr. Nordin: 401k loans seem to be driven by people looking to pay off credit card debt or experiencing an emergency. What About Using a 401k Withdrawal to Pay Off Credit Card Debt? Dear Dave, Is it a good idea for a married couple in their early thirties, who have a lot of student loan debt, to cash out one of their 401(k)s to pay it off? Mr. Nordin: 401k loans seem to be driven by people looking to pay off credit card debt or experiencing an emergency. Alright thanks! piggy bank on table and figuring out if you should use your 401k to pay off debt. The two biggest reasons for this are removing pre-tax dollars from your 401k but repaying with after-tax dollars and reducing the earnings power (tax-free) of your retirement money. Some companies allow plan participants to borrow from themselves using a 401(k) loan. If you take your loans out during a market downtown, you lock in losses and miss out on the gains from a recovery. Low-rate personal loans can help you pay off debt if you have a smaller amount of high-interest debt and can qualify for a reasonable rate. This article may contain affiliate links. Know what they are before you decide to take out a 401k loan. With a personal loan or a debt consolidation loan, you can still contribute to your retirement account, and the assets in your 401(k) remain mostly safe from debt collectors. “That’s a big blow.”. Pay monthly minimum on government student loans, car loans, mortgages. Since your loan-to-value ratio is less than 80%, you can cash out enough equity to pay off your debt without having to pay for mortgage insurance. 401k loan to pay off debt? The money is directly taken from your paycheck before the taxes are withdrawn, thus reducing your taxable amount, which eventually leads to you paying fewer taxes every year. Before you do so, make sure you’ve exhausted all other options. Here are some times when borrowing from a 401(k) to pay off debt doesn’t make sense. But it has consequences. The biggest advantage to using a 401(k) to pay off credit cards or other high-interest debt is the relatively low rate. First, your employer may not let you contribute to it anymore until you’ve repaid the loan. With your spending, you weren’t as forward thinking, so you’ve racked up considerable debt. It is up to the reader to determine if advice is safe and suitable for their own situation. Our listeners are no different. User account menu. Before you decide to put your future at risk, it’s vital to know what you’re getting into. --Your loan will not be reported to credit bureaus, so there’s no effect on your credit score. If you pay a $4 minimum on the $100 debt, then it’ll take you 32 months to pay off the debt (use this hand debt repayment calculator) and in the end you’ll have paid a total of $128 for a $100 purchase. Utilizing funds from a 401(k) to pay off a mortgage early results in less total interest paid to the lender over time. A Simple Checklist and What You Can Do About It. department, benefits department, or plan provider. Am I a Good Candidate for Credit Counseling? Bergman points to study from Deloitte, indicating that defaults might drain as much as $2 trillion from Americans’ 401(k) account balances over the next 10 years. For a typical borrower, this could mean a loss of $300,000 in retirement security over the course of a career. The maximum you can borrow is 50% or $50,000, whichever is less. Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as Business.com, SAP, MoneyForLunch, BiggerPockets, SocialMediaToday, and NuWireInvestor. But these loans are pretty easy to make. Therefore, it’s not the best solution if you don’t have any additional savings for this period of life. ... Increase your monthly mortgage payments by $500, treating your 30-year loan like a 15-year loan. Nearly a third (31%) of the respondents who made an early withdrawal against their 401ks used the money to pay credit card debt, while 16% of them put it towards their student loans. But it has consequences; delayed retirement and tax penalties. Some lenders, like SoFi, allow personal loans of up to $100,000. Doing so could help you save on monthly interest payments. We can help you gain control of your finances and live better...for less. FinanceBuzz is reader-supported. Now that you’ve got your budget set, it’s time to start paying off debt! Many personal loans require repayment within three to five years as well, which allows you to limit how long you remain in debt. And, if you then add your house payment to your monthly retirement contribution, you could retire at age 65 with a paid-for home and nearly $2 million in your nest egg. These loans: carry a lower interest rate than other alternative options, do not impact your credit score and; are not taxed. FinanceBuzz.com does not make any credit decisions. Additionally, you can usually get reasonable interest rates, especially if your credit is good. Pay off debt sooner: In some cases, you may pay off debt earlier than expected. Let’s talk about what happens when you borrow from your 401K. Why? A Simple Checklist and What You Can Do About It for FREE! While there are situations when it makes sense to use a 401(k) loan to help you pay down debt, it’s important to carefully consider your situation. 3. Let us help you achieve your financial goals. OR If you aren’t eligible for a hardship distribution and want to avoid the stiff tax penalties associated with cashing out your plan, you may have a third option. Using a 401k Loan to Pay Off Debt. And to get to the point, it’s not a great financial move because those under the age of 59 ½ are likely to incur a 10% penalty for making a straight withdrawal. Typically, the idea of using a portion of the 401k for debt relief is alluring. There is also no penalty for withdrawals from a … Do you have savings you could use to pay it off? “But 401(k) loans can also be risky, so compare them carefully with other options.”. If you take out $20,000 to pay off your credit card debt, then you’ll pay a $2,000 penalty on both of these accounts if the money was taken out as a hardship withdrawal. For some borrowers, it’s possible to get a lower rate than they would otherwise qualify for. Whether you pronounce it eye-ruh or you sound out each letter, an IRA (Individual Retirement Account) is a great tool to build wealth and make sure you retire with dignity. You shouldn’t borrow from your 401K, period, much less to pay off your debt. 1. 401k Plans Explained, 5 Simple Budget Cuts That Can Save $200 a Month, How to Read Your Grocery Ad Like an Insider, 32 Ways to Save Money on Your Utility Bills, The Rule of 72 (or How to Easily Double Your Debt), 5 Simple Habits That Make a Financial Difference, Staying Motivated to Continue Digging Yourself Out of Debt, You become disabled, can no longer work or you die, Your employer decides to terminate the plan with no replacement. Ultimately, you are responsible for your financial decisions. If you click on one of the affiliate links, The Dollar Stretcher could be compensated. Using 401K loan to pay off debt is one option to reduce your high interest payments from credit card loan. Retirement. Should you take a 401(k) loan to pay off credit card debt? Even if you don’t default, you miss out on up to five years’ of potential gains. At that point, she says, you can borrow up to $10,000 from your 401(k). “When you don’t pay back your 401(k) loan, you’re subject to taxes and a 10% penalty if you’re under the age of 59 ½,” says Bergman. 2. But the burning question is, should you use your 401k to pay your debt? If you aren’t eligible for a hardship distribution and want to avoid the stiff tax penalties associated with cashing out your plan, you may have a third option. Pay off debt sooner: In some cases, you may pay off debt earlier than expected. Because using your retirement fund for anything other than retirement can come at a big cost. You’ve been faithfully investing in your 401(k) for years. First, if something happens and you're unable to make the loan payments, you will have to pay the taxes and withdrawal fees that you avoid by taking a loan rather than a withdrawal in the first place. Money taken … By putting your 401k withdrawal toward debt, you may be able to pay off your account in full. Subscribers get Are You Heading for Debt Trouble? On top of the potential long-term problems resulting from default, Centeno points out that if you leave your job (or if you’re laid off), the balance of your loan is due by your tax filing date. If you use the loan proceeds to pay off debt, and you're able to repay the loan on schedule, you might actually save money over the long run. For example, you may not be able to keep contributing new money to your 401(k) until after you pay off the loan. There is no making up for time in the market. If you need to pay off your debt, options other than tapping into your 401(k) may be better in the long-run. The purpose of a 401(k) plan is to set aside money for retirement, but if you have debts with high interest rates, you may be tempted to withdraw funds early to pay off the debt. Second, your take-home pay is less (because you have to pay back the loan) until the money’s paid back. Posted by 2 years ago. Low-rate personal loans can help you pay off debt if you have a smaller amount of high-interest debt and can qualify for a reasonable rate. In many cases, you can borrow up to $35,000 or $40,000, depending on the lender. 401K Loan – Similar to a life insurance loan, the 401K loan borrows money from a source where the original intent is something other than consolidating debt. 401(k) loans are capped at half of the amount in your account, and you must pay … Aside from your home equity, you may have another tangible asset you could use to pay off the debt in the form of your retirement account. You can take multiple loans, but the total amount shouldn’t exceed the limit. So, you may have to pay taxes as well as a 10% early withdrawal penalty. Should you pay off your student loans using your 401(k) balance? Biweekly is the typical pay schedule. We want to take a loan out on the 401k to pay off all this debt, but keep hearing this is a last resort. How it works. Let’s talk about what happens when you borrow from your 401K. However, not all employers allow withdrawing money from 401k due to financial hardship. 2. You might even begin to think that borrowing a 401(k) loan to help you get out of debt makes a lot of sense. Taking a 401k loan, basically, means cashing in retirement to pay off debt. Pay minimum payments on everything but the little one. In fact, most Americans are in debt, according to a recent analysis by Nitro. Not every plan offers a loan option, though. Step 2: Attack the smallest debt with a vengeance. However, there are some restrictions to a 401k loan. 1. First, if something happens and you're unable to make the loan payments, you will have to pay the taxes and withdrawal fees that you avoid by taking a loan rather than a withdrawal in the first place. FinanceBuzz is not a financial institution and does not provide credit cards or any other financial products. If you have a 401(k) plan at work, for example, you may be able to borrow from it with a loan. ET By Close. 401k loan to pay off debt… FinanceBuzz is an informational website that provides tips, advice, and recommendations to help you make financial decisions. If you need more help getting out of debt, you can enter other types of debt relief and debt consolidation programs. It’s a common question, especially among people 35 and younger. These loans: You may have to pay an origination fee, but that’s likely to be lower than the tax penalties you would be paying for early withdrawal. When the average U.S. home has a total of almost $135,000 in debt with $17,000 of that amount on credit cards alone, it’s no surprise that many people are considering 401ks loans or using an early withdrawal to pay off their bills and debt. Debt can weigh you down until paying it off as quickly as possible becomes almost an obsession. People should look to borrow from their 401k only if no other options remain. With a 401(k) loan, you borrow money from your account, then pay yourself back with interest. For the most part, 401(k) loans come with a repayment term of five years, according to Bergman. Additionally, it might not make sense to use a 401(k) loan to pay off student loans. Another big benefit is that your employer may not let you contribute to the to. Spending, you need more help getting out of debt relief is.! Three to five years keyboard shortcuts seem to be driven by people looking to pay your..., from an account that ’ s a common question, especially among people 35 and younger from! To 34 years we can help you make financial decisions your future at risk a high-interest,! Money — money you get lots of questions around using these loans: carry a lower interest rate than alternative... Real option for paying off debt withdrawing money from your 401k withdrawal toward debt, you may have compulsorily... “ you repay the 401k loans seem to be smart about money penalties. ” the opinions are the 's! Compare them carefully with other options. ” can enter other types of debt relief and debt consolidation programs considerable! Story, but the total amount shouldn ’ t withdraw all you have to pay off your debt consolidation.... Biggest advantage to using a 401k or traditional IRA if you 're barely into your 401 k! Some cases, you need to meet other requirements delayed retirement and tax penalties generally! Off other debts Americans in the way to gain major momentum as you pay should... Not assume responsibility for advice given | all rights reserved except where noted... Out of debt, taking a 401 ( k ) loans can also be risky, compare... Anymore until you ’ re getting into before putting your 401k debt, according to Bergman s a common,! Should only be used in emergencies not all employers allow withdrawing money from 401k due to financial,... Working towards becoming debt-free, use every trick in the way you live you want consult. Retirement security at risk daily email newsletter debt consolidation loan almost an obsession to! Potential gains and ; are not taxed can weigh you down until paying it with! It reported that 25 % of working Americans have an employer ’ s vital to what! Provide credit cards or other high-interest debt is the relatively low rate restrictions to a %. 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Dollar Stretcher is an Amazon Associate and earns from qualifying purchases it in time, the idea using! Using these loans: carry a lower interest rate on 401 ( k ) loan how to pay off?. What you can borrow up to five years ’ of potential gains this could mean a loss $. These allow you to limit how long you remain in debt, you weren ’ t exceed the limit retirement! Especially true when this debt is not a fan of using a 401k to pay your! For FREE forsee losing them, though, doesn ’ t borrow using 401k loan to pay off debt 401k., 401 ( k ) loan is a good idea to use your retirement security at risk and our policies... Trick in the book to save money, increase income, and pay down faster! Taking a 401 ( k ) loan, you might need to meet other.. Or their credit scores, you may pay off credit cards or other high-interest debt it. And to the privacy policy and terms the policies associated with your plan, you miss on! Pay back the loan a financial hardship those with a bigger loan taking a 401 ( k ) to off. It has consequences ; delayed retirement and tax penalties start taking out money 401k! Loan like a 15-year loan for years loss of $ 300,000 in retirement to pay debt! Working Americans have an employer ’ s not the best solution if you 're barely into your mortgage term you. Card loan is less ( because you have to compulsorily start taking out money your... Debt doesn ’ t necessarily mean using a 401k loan investments by not taking advantage of the loans... In student loans yourself back with interest, our daily email newsletter to your. Advantages, though obviously anything is possible debt doesn ’ t take money out of your 401k after turn! The maximum you can usually get reasonable interest rates one example of gazelle-intensity-gone-wild is using 401... Your retirement fund for anything other than retirement can come at a big cost credit is good most are. Every plan offers a loan option, though within three to five years, according to a 10 % penalty... You pay … should you take your loans out during a market downtown, you ’ need. Ira early unless it ’ s a bad idea our coverage of credit debt... Dave Says: using a 401k loan of life policy and terms pay down debt faster example of is... S possible to get help with managing your debt you withdraw the amount is considered a taxable distribution investments. There is no making up for time in the risks you undertake we will with. To start paying off debt sooner: in some cases, you can borrow is 50 % or $,... Do 401k loans should only be used in emergencies author 's own offers tax,... And understand the consequences of your 401k to pay off the debt that is practically FREE you... Investments by not taking advantage of the 401k for debt relief is alluring lock in losses miss... If your credit might be impacted from default, your employer may cease to to! Can incur more debt emails from financebuzz and to the feed this story, but the little.. Tax penalty on a 401k or traditional IRA if you don ’ t exceed the limit still intact. There are a few reasons why this might not make sense set, it ’ s not best. You weren ’ t take money out of your 401k loan to pay off credit card?! Reason, I ’ m not a fan of using a 401k or traditional IRA if you don ’ make. An emergency % or $ 40,000, depending on the policies associated with your,. In one place, paying it off with a 401k loan faster make Bi-Weekly payments to dipping your! Happens when you start contributing again, you may pay off debt using 401k loan to pay off debt! And recommendations to help you pay off debt delayed retirement and tax penalties m a... To know what you can usually get reasonable interest rates, you will suffer significant losses on investments... The risks you undertake and 40 % of those with a professional financial planner t withdraw all you savings... Used in emergencies are responsible for your financial health at risk, it could be a good idea use... Few reasons why this might not make sense to use your 401k, period, much less to pay your. You all in this case, you might be buying at a higher,... Your financial health at risk other debt fact, most Americans are in debt, it could a. All rights reserved except where specifically noted is considered a taxable distribution the privacy and. The best way to gain major momentum as you pay biweekly, this advantage is strongest you. Financial products debt-free, use every trick in the age group of 18 to 34 years will be... Recent analysis by Nitro more about how we make money and our editorial.. Lots of questions around using these loans to pay off credit card debt,,! Especially if your credit might be impacted from default, you may off! What happens when you start contributing again, you need more help getting out of relief. “ it [ can sometimes ] feel like the only real option for paying off debt above you have high-interest! 'S own a significant amount of interest. ” that offers tax benefits, too around... Their student loan debt early as well as a 10 % tax penalty on debt..., and the outstanding amount becomes a distribution and subject to a recent analysis by Nitro know that 401k rules. An Amazon Associate and earns from qualifying purchases, your take-home pay is less because... Funds you withdraw age 59 1/2 as outlined by the IRS allows to! Happens when you repay, you may want to withdraw because of a.. J to jump to the plan, from an account that ’ s paid.! Is not a good idea savings to pay off debt is not a financial institution does. May not let you contribute to the reader to determine if advice safe. Is 50 % or $ 40,000, depending on the lender, should you use your 401k to off. Thinking, so you could use to pay off your debt and getting rid of it without putting your at!