14 May Should I borrow money from my 401(k) to pay off my debts?
Your 401k is meant for your retirement. Don’t ever treat it like an emergency fund. One of the most frequent mistakes I noticed people make is that they will borrow money against their 401K to pay off credit card debts or medical debts. Within a short period of time, they realized that they are not going to be able to make the 401k loan payment.
Question: Is there an alternative relief to pay off my debts even if I don’t need to borrow money from my 401(k)?
Answer: YES! The reality is that many people are struggling financially and want to find relief someplace; but tapping into retirement accounts is a big NO-NO. Instead, they may want to consider bankruptcy. For those who are unemployed or who don’t make enough money to pay their bills and maintain a basic living standard, Chapter 7 bankruptcy offers an opportunity to discharge all of their unsecured debt. Retirement is an important part of your future, don’t give creditors access to it by cashing it out or borrowing against it to repay debts. If your financial situation is that bad, you may just need to file bankruptcy.
Question: Will I lose potential earnings if I borrow from my 401(k) to pay off my debts?
Answer: YES! While you may think that the interest rate on your debt is higher than the interest on your 401(k), remember that the money in your retirement savings have the benefit of compounded interest. There are also substantial tax penalties from taking money out of your 401(k), so keep these fees in mind.
Question: What will happen to my existing 401(k) loan if I leave my company or if I will be laid off?
Answer: If you leave the company or are laid off, it’s likely that you will be required to pay off any amount that you’ve borrowed from your 401(k) immediately. This could cause a big problem for you if you’ve borrowed a large amount and do not have the funds available. If you consider the disadvantages to using a 401(k) to pay off debt, it’s a better idea to consider filing bankruptcy.
Question: How much will the payments on my 401(k) loan going to reduce from my paycheck?
Answer: It depends to some extent on how much you borrowed, but every plan is different. Before you borrow from the plan, you need to know how it will affect your budget. Approach this question just as you would consider whether to re-finance your home to settle credit card debts. If the 401k loan is going to leave your budget so short that you can’t make your mortgage payments, you are probably going to be better served by filing bankruptcy.
Question: What are the factors to consider before borrowing money from my 401(k) to pay off my debts?
Answer: The following factors should be considered before borrowing from your 401K:
- Analyze first the number and type of outstanding debts.
- How much are the payments on your 401k loan going to reduce your paycheck?
- How close are you to retirement, and how much are you going to deplete your retirement savings?
- How secure do you feel with your job?