I'm considering taking a loan out against my 401k to pay off my remaining credit card and medical debt.
What are the pro's and con's of this? The big obvious pro is paying off that debt at a much lower interest rate, the big con being losing out on that money making more money.
I think it's a fine idea so long as you have the discipline to pay it back and to never charge more to your credit card than you can pay in full when the bill comes.
What are the current debts, the current interest rates, and the current size of the 401k? How long would it take you to pay it back? What interest rate would you have to pay yourself back? In general, the answer is yes, that is a terrible idea, but not always.
I'd say it is a worse idea right now since I think the market is going down for the next few months, but that is purely uneducated speculation worth about the same amount as a pile of dog poo. (Although now that I've said this, disregard it... It doesn't make any sense whatsoever)
I'd say the better idea would be to get a personal loan to do it if possible. Or, assuming the interest rate on the card is high, get another card with either a really low introductory rate or a really, really great rewards system, and pay off the medical debt.
Really no good options here though, unless you're taking it from a personal loan. I'd go to a credit union and see if you can't roll it into one.
Do you have a debt elimination plan? There are a lot of them out there. Generally speaking, you are thinking about paying off unsecured debt with a 'consolidation loan'. Which just happens to be from your 401k versus another financial institution. Most of the time, that is a bad idea.
Unless you cannot make the payments.
Well, you can look at interest rates. Credit card interest that you pay is likely higher than the 401k interest rate you gain.
You will likely have to be very careful about the 401k rules to avoid penalties that might negate the 'gain' though.
If it were me, I would reduce the amount I put into 401k to minimize my contribution while still getting the full company match, and then divert all the 'extra' contribution to the debt right away (Stop/slow contributions to 401k but don't take any out on loan). Also, I might look into a new credit card with a zero balance transfer fee and 0% APR for 18 months (they are coming back, I just got an offer in the mail). That way I could pay off the debt at 0% interest for the first 18 months. You then might even be able to kick the can again before the 18 months is up. Again, pay close attention to the rules otherwise they will hit you with big fees and interest.
For simplicity sake, eliminate the debt first, then focus on building the savings/401k.
Another option is your local credit union or bank might be able to give you a debt consolidation package that could achieve your goal of a significantly lower interest rate without the possible 401k red tape.
Cue Dave Ramsey advocate in 3... 2... 1...
trucke wrote: Do you have a debt elimination plan? There are a lot of them out there. Generally speaking, you are thinking about paying off unsecured debt with a 'consolidation loan'. Which just happens to be from your 401k versus another financial institution. Most of the time, that is a bad idea. Unless you cannot make the payments. Debt Elimination
I'm familiar with the snow ball idea.
When I did a 401 loan they made me pay it back on automatic payments direct from my paycheck. There was no option about it.
what happens if you take out the loan, work one week, then have a heart attack or stroke or serious accident? what if your on temporary disability, or worse, permanent partial disability? with the debt and a fully funded 401K, the debt can be forgiven with bankruptcy or default (you will lose your credit, but you wont care), but you will be able to keep your 401K. if you borrow against the 401K, that money is gone till you pay it back, and you may find yourself in a situation where you can't do that. Plus, no one will lend to you being out of work. its a risk, and a low reward, high risk one at that. don't pawn your future to pay off your past.
my suggestion? cut some unneeded monthly's (cable/sat, phone plan, etc), work some OT, and pay that bitch off the right way. at the MOST, i'd say you could pause your 401K contributions and use the extra paycheck money toward bills, but unless that pause would be for less than 6 months, i wouldn't.
-J0N
There really is no good answer without running the numbers.
Layout what the opportunity costs of the 401K loan. Here is a good calculator: http://www.bankrate.com/calculators/retirement/borrow-from-401k-calculator.aspx
From there figure out the total interest costs of the debts and see what looks better.
Most of the personal finance guide teach people to be debt free but not wealthy.
one thing i forgot, medical debt will take almost any payment, and there's rarely interest. send them as little monthly as they will accept, and get rid of the CC debt first. this way you save interest money, but dont have to change anything or risk your nest egg.
-J0N
It's a terrible idea.
If you want more specifics we'll need more info. But my main suggestion is cut expenses and pay the debts through income. You should be able to pay them off very quickly that way.
Unfortunately I won't really be able to decrease my expenses anytime in the foreseeable future.
Separating from my wife and getting my own place (and likely an upcoming divorce) has dramatically increased my cost of living at the moment. Once it's finalized, not paying her car insurance/health insurance will also give me back about $225/month.
That's why I was considering this as a way to just knock out that bit of worry.
stroker wrote: When I did a 401 loan they made me pay it back on automatic payments direct from my paycheck. There was no option about it.
Well aware, that's not an issue for me.
Dang, sorry to hear about that.. Sorry if my tone wasn't appropriate, I didn't know your situation.
No problem, I didn't take any offense to it.
I know it's not the best idea to do, but I'm also only 33 which means I've still got realistically 30+ years to save for retirement. And doing so would essentially put ~$350/month back into my budget.
I feel like it would ease a lot of stress in the current situation.
z31maniac wrote: No problem, I didn't take any offense to it. I know it's not the best idea to do, but I'm also only 33 which means I've still got realistically 30+ years to save for retirement. And doing so would essentially put ~$350/month back into my budget. I feel like it would ease a lot of stress in the current situation.
Easing the stress, improving your mental health... Those are things that you really can't put a price tag on, so only you can know if it is worth it.
Personally, before I did that I'd go to a few credit unions and/or banks and ask about a consolodation loan. And if those aren't available, I'd decrease my 401k/IRA/Emergency fund/other savings contributions by $350 a month if the debt is bothering you that much.
Other idea, do you have a Roth IRA? You can pull out the contributions from that, penalty free.
Good luck with your life changes. I would try what mtn suggests, look for debt consolidation or try to reduce your contributions for now.
mtn wrote: Other idea, do you have a Roth IRA? You can pull out the contributions from that, penalty free.
Unfortunately no.
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