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Is it smart to borrow from my 401k?

Credit Card Debt discussions & tips

Is it smart to borrow from my 401k?

Postby tarrant37 » Mon Sep 24, 2012 6:08 pm

Is borrowing from my 401k to pay of credit card debt a good idea? I will continue to contribute as i have been while also repaying the loan. There is a small fee for the loan but its not much. I am also keenly aware of the pitfall that could await if i were to rack up more credit card debt. That's not going to happen.
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Is it smart to borrow from my 401k?

Postby laibrook48 » Mon Sep 24, 2012 6:13 pm

It all depends on the type of 401K you have and what the plan documents say. Some 401K's will let you borrow and pay it off with a weekly payroll deduction, and continue to withhold into your 401K. However, some plans will not allow it. It also depends on if you are planning on staying with the company you currently work for, because if you leave you will be unable to make those payments and you will get taxed at year end and take a big hit.

If you plan on staying employed at the same place its not necessarily a bad thing to borrow from your 401K. I would suggest the quickest payback method that you can afford. Its cheaper and more cost effective to borrow from 401K than to take a loan out from a bank, or pay interest on high yeilding credit cards. Just have to remember that you have to remained employed at your current company until that loan is paid off.

Best of luck to you!!
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Is it smart to borrow from my 401k?

Postby corrick » Mon Sep 24, 2012 6:20 pm

>>I fail to see how paying myself less interest than i'm giving BOA and CITI is a bad idea.<<

Because there are several things you aren't considering.

--First off, you are losing the potential growth of the money you are borrowing. With the economy the way it is right now, you'd be taking money out of an investment at exactly the wrong time.
--Secondly, if you lose your job, the loan is due in full within 60 days. If you can not pay it back within that time, you will be taxed and penalized on that money. That is going to cost your more than the interest on your credit card
--Lastly, if you can afford to pay back the loan, you should take that money and pay it on the credit card balance. The loan payment is likely to be more than the credit card minimum payment. Pay that full amount on the credit card debt, and you'll pay the credit card off faster than you would have paid the loan back.

Here's the thing you need to look at. If you are paying 22% on your credit card, and you can borrow the money from your 401(k) at 5%, that seems like a good deal. But if the loan takes you 5 years to pay back, and the credit card could have been paid off in a year, you aren't really saving any interest.
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Is it smart to borrow from my 401k?

Postby loefel » Mon Sep 24, 2012 6:29 pm

No. Check with your plan administrator because most 401k plans do not allow contributions while you have a loan outstanding.

You might consider lowering your contribution percentage for a short while, using the difference to pay down the credit card debt.

It would be ideal to contribute enough to max out your company match. That is a 50% (some companies 100%) immediate return, even more than high credit card rates.
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Is it smart to borrow from my 401k?

Postby donahue » Mon Sep 24, 2012 6:31 pm

Big factor you need to consider: the money in your 401k is invested so you have to consider that you would also lose the interest that your investment would otherwise be bringing in.

Add in the fact you can probably not contribute until the loan is paid off plus the fee and it just makes more sense to do budget tight and pay down the credit card debt as fast as you can the old fashioned way.
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Is it smart to borrow from my 401k?

Postby mathews24 » Mon Sep 24, 2012 6:40 pm

It's never a good idea to borrow from your 401K. Never ever.


I hear you;
"I fail to see how paying myself less interest than i'm giving BOA and CITI is a bad idea".

There are many issues including the psychology of it. As suggested by someone else...... lower your 401K payment...... ONLY IF THERE's NO OTHER WAY...... be honest with yourself..... cut something else from your budget.... maybe a cell phone.... maybe a car.... something else... not the 401K.
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Is it smart to borrow from my 401k?

Postby azzai » Mon Sep 24, 2012 6:53 pm

Not a smart idea. If need be, cut back on your 401K contributions and use that money towards the debt.

Borrowing to pay debt never makes any sense.

Jerry is right, most plans don't allow contributions if you have a loan.
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Is it smart to borrow from my 401k?

Postby ashishishe27 » Mon Sep 24, 2012 6:58 pm

to answer your question....it is not smart
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