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Using 401k Loan To Pay Credit Cards?  
User currently offlineJoePatroni707 From United States of America, joined Dec 2012, 493 posts, RR: 0
Posted (1 year 3 months 3 days 5 hours ago) and read 1765 times:

I have been struggling with paying off credit cards for some time. I currently pay about 9% apr on them. I have about $5,000 in credit card debt. I am thinking of taking a 401k loan at 3% and spreading it out over 24 months. Now I have been earning about 11% on my money in the 401K, but instead of paying interest of 8% to banks, I will pay 3% to my self. I know financial experts say you should never touch your 401k.

18 replies: All unread, jump to last
 
User currently offlineFr8mech From United States of America, joined Sep 2005, 5657 posts, RR: 15
Reply 1, posted (1 year 3 months 3 days 5 hours ago) and read 1748 times:

Have the laws been changed to allow a 401k loan for debt payment?

What kind of 401k balance are you carrying?

How old are you?

The problem with taking any loan to pay off credit card debt is that it does not change behavior.

Can you live without the credit cards? If not, you will just dig a bigger hole.

My advice: kill off the credit card usage completely. Pay off what you can afford. Take the loan ONLY if you can't pay down quickly and the credit card usage is finished.



When seconds count...the police are minutes away.
User currently offlinebennett123 From United Kingdom, joined Aug 2004, 7809 posts, RR: 3
Reply 2, posted (1 year 3 months 3 days 5 hours ago) and read 1745 times:

If you get growth of 11% on your 401K, but your loan only costs 9%, then why is it a good idea to take money out of your policy.

IMO, the 3% paid into the 401K is a red herring, you get 3% interest paid to your policy, but you are paying the 3%.


User currently offlineokie From United States of America, joined Jul 2003, 3188 posts, RR: 3
Reply 3, posted (1 year 3 months 3 days 5 hours ago) and read 1740 times:

Just pull the plug on the card use.

Change your behavior.

Eat beans and rice and hang out on Anutters for about a year and plop down $500 a month towards the cards.

In about a year you will have cards paid and burned out on Anet and then start using cash.

Okoie


User currently offlinetugger From United States of America, joined Apr 2006, 5786 posts, RR: 10
Reply 4, posted (1 year 3 months 3 days 4 hours ago) and read 1712 times:

Quoting JoePatroni707 (Thread starter):
I have been struggling with paying off credit cards for some time. I currently pay about 9% apr on them. I have about $5,000 in credit card debt. I am thinking of taking a 401k loan at 3% and spreading it out over 24 months. Now I have been earning about 11% on my money in the 401K, but instead of paying interest of 8% to banks, I will pay 3% to my self. I know financial experts say you should never touch your 401k.

The simple answer is: No, don't do it, it is not a good value or worth it.

OK, are you ready for the simple bad math on it? Here goes:
You have $5k in debt with a rate of 8%
You want to take out $5k form your 401k that is currently earning 11%
You will then pay 3% on that $5k loan

That means you lose 11% (for the $5K) that you earn and turn it into 3% that you pay out, that's a 14% flip in the interest for that $5k. You are essentially paying 14% on that loan to yourself. Just so you do not pay 8%.....

Now I know there is more to it because you probably end up with more money in your pocket each month for the moment etc., etc., but the value isn't just isn't there in the long run.

Tugg



I don’t know that I am unafraid to be myself, but it is hard to be somebody else. -W. Shatner
User currently offlinevikkyvik From United States of America, joined Jul 2003, 10339 posts, RR: 26
Reply 5, posted (1 year 3 months 3 days 3 hours ago) and read 1689 times:

Quoting Fr8mech (Reply 1):
Have the laws been changed to allow a 401k loan for debt payment?

According to the Merrill-Lynch guy who handles our 401K at work, you can borrow money from your 401K for basically anything.

That said, I don't recommend borrowing from your 401K to pay down your credit cards. Better to cut out current expenses and pay them down, even if it takes some time, rather than screw with your retirement savings. That $5K in your 401K could be worth a heck of a lot of money in 30 years.



How can I be an admiral without my cap??!
User currently offlineikramerica From United States of America, joined May 2005, 21583 posts, RR: 59
Reply 6, posted (1 year 3 months 3 days 3 hours ago) and read 1689 times:

The problem with that math is this:

401K future performance is not assured.
Nor is the 9% average interest rate, I assume.

In short order, the math could flip. Then you are paying 12, 15 or more on the credit card, and only earning 8%.

If your debt is variable, the longer you keep it, the worse.

But is the OP contributing to the 401k this year? Can't you stop the contribution to pay off the debt? Or is it matched by his employer? In which case that would be dumb...



Of all the things to worry about... the Wookie has no pants.
User currently offlineFr8mech From United States of America, joined Sep 2005, 5657 posts, RR: 15
Reply 7, posted (1 year 3 months 2 days 18 hours ago) and read 1599 times:

Quoting vikkyvik (Reply 5):
According to the Merrill-Lynch guy who handles our 401K at work, you can borrow money from your 401K for basically anything.

Well, that's just plain stupid. Used to be the inly things you could take a 401k loan out for was purchase of primary residence and education costs.

Quoting tugger (Reply 4):
That means you lose 11% (for the $5K) that you earn and turn it into 3% that you pay out, that's a 14% flip in the interest for that $5k. You are essentially paying 14% on that loan to yourself. Just so you do not pay 8%.....

Plus, what you're going to continue to pay on the new credit card debt you accumulate.

Unless spending habits are changed, you will wind up in a worse predicament.

I won't tell you to rule out a loan immediately, even though I think it's stupid, but will tell you not to take the loan until the credit card is gone and you've established a budget you can live with without using the credit card(s). If you do that, I think you'll find you don't need the loan.



When seconds count...the police are minutes away.
User currently offlinecasinterest From United States of America, joined Feb 2005, 4792 posts, RR: 3
Reply 8, posted (1 year 3 months 2 days 16 hours ago) and read 1569 times:

Quoting JoePatroni707 (Thread starter):
I have been struggling with paying off credit cards for some time. I currently pay about 9% apr on them. I have about $5,000 in credit card debt.

Joe,
5,000 of debt is not worth using the 401K for. Can you afford the hit to your income to pay off the loan? Most of these loans come in the form of paycheck extraction.

If you have the credit history, get a new card and toll the balance for 18 months on a qualifying card and just pay the 3% transfer fee. Then do what the others above have stated, and pay that sucker down . Eat Ramen noodles for awhile.



Older than I just was ,and younger than I will soo be.
User currently offlineAviRaider From United States of America, joined Nov 2007, 185 posts, RR: 0
Reply 9, posted (1 year 3 months 2 days 16 hours ago) and read 1560 times:

I wouldn't but I would stop using the card and curb your expenses and extra money goes to debt. Start you a budget. You need to know exactly where your money goes and eveything gets allocated to something. Check out daveramsey.com he is the author of total money makeover and financial peace. His philosphy is that our money should work for us not us working for our money. Great program.

User currently offlineL-188 From United States of America, joined Jul 1999, 29836 posts, RR: 58
Reply 10, posted (1 year 3 months 2 days 10 hours ago) and read 1508 times:

Well in my opinion and I will phrase this in Battlestar Galactica type language to get past the language sensors here


Don't Fracking Do It

In addition to the interest and the IRS penalty on it, you also will have to pay the Taxes due on it (I assume it is a traditional). Plus you will take a hit on it because while the money you put in initially was tax free(traditional) when you pay back the loan it will be with after tax dollars.

It's nice to have that option but IRA loans really should only be used for truly dire circumstances. Keeping a roof over your head or paying a doctor to reattach your kids arm after a horrible hot wheels accident.

Credit cards charge that rate because the are not secured,ntherefore the card company takes more risk since they can't attach an asset. It is also the reason why they scream the loudest when they don't get paid, it is about the only way they can recover, pay the off with the rice and beans method. They will scream but guess what, that is why you are paying them the higher intent rate, they are last in line.



OBAMA-WORST PRESIDENT EVER....Even SKOORB would be better.
User currently offlineFr8mech From United States of America, joined Sep 2005, 5657 posts, RR: 15
Reply 11, posted (1 year 3 months 2 days 9 hours ago) and read 1493 times:

Quoting L-188 (Reply 10):
In addition to the interest and the IRS penalty on it, you also will have to pay the Taxes due on it (I assume it is a traditional).

Assuming the same rules are in place that existed back when I pulled a loan to buy a house, there is no tax hit and there is no penalty. It is all done within IRS regulations.

Quoting L-188 (Reply 10):
Plus you will take a hit on it because while the money you put in initially was tax free(traditional) when you pay back the loan it will be with after tax dollars.

That is correct...the repayment funds are not tax free.



When seconds count...the police are minutes away.
User currently offlinevikkyvik From United States of America, joined Jul 2003, 10339 posts, RR: 26
Reply 12, posted (1 year 3 months 2 days 8 hours ago) and read 1487 times:

Quoting Fr8mech (Reply 11):
Quoting L-188 (Reply 10):
In addition to the interest and the IRS penalty on it, you also will have to pay the Taxes due on it (I assume it is a traditional).

Assuming the same rules are in place that existed back when I pulled a loan to buy a house, there is no tax hit and there is no penalty. It is all done within IRS regulations.

That is correct. There is an IRS penalty if you withdraw 401K funds. You can borrow from your 401K as you see fit, and just pay interest.



How can I be an admiral without my cap??!
User currently offlinetype-rated From , joined Dec 1969, posts, RR:
Reply 13, posted (1 year 3 months 2 days 8 hours ago) and read 1466 times:

Quoting vikkyvik (Reply 12):
That is correct. There is an IRS penalty if you withdraw 401K funds. You can borrow from your 401K as you see fit, and just pay interest.

True, a loan against the 401lk is just using the 401k for collateral against the loan. Now a withdrawal is a different animal. You pay a tax on it and then an additional 15% penalty tax to the IRS if you are under age 591/2. It's costly. Now there are ways to take money out of a 401kl for true emergency (hardship) purposes. Check with the IRS to see if you qualify.

But as others have said, I don't recommend it. Obama is still in office. You may need that money someday.

You may even want to close a few credit cards out if you feel you have too many when you pay them down. Having 3 credit cards seems to be what most credit bureaus like best. Any more or any less affects your FICO score.


User currently offlineFlighty From United States of America, joined Apr 2007, 8769 posts, RR: 3
Reply 14, posted (1 year 3 months 2 days 7 hours ago) and read 1449 times:

The way to fix credit card debt is keeping way more money around than you need. That way, even in an emergency you would never think of using credit cards to get money.

If making more $ is not an option, lower the needs. Sleep in your mom's basement. Get a job at a coffee shop and sleep there. The idea of running out of money is way scarier to me than sleeping at my office.

Good luck


User currently offlineAesma From France, joined Nov 2009, 6937 posts, RR: 12
Reply 15, posted (1 year 3 months 2 days 6 hours ago) and read 1432 times:

First, credit cards are not common here, even less having several of them. So I'm not familiar with the concept of doing your groceries and paying that way. Debit card is the way to go.

Now, explain me something. The Fed rate is almost 0%, just like the ECB rate. So,

1/ how can your 401k rake in 11% ? Is it very risky stuff that can get wiped out instantly ? Or are people being exploited to provide such returns, child workers or something ?

2/ how can you tolerate an 8% loan ? Can't you get a better deal, maybe using the 401k as collateral ?



New Technology is the name we give to stuff that doesn't work yet. Douglas Adams
User currently offlinejohns624 From United States of America, joined Jul 2008, 957 posts, RR: 0
Reply 16, posted (1 year 3 months 2 days 3 hours ago) and read 1406 times:

Quoting Aesma (Reply 15):
1/ how can your 401k rake in 11% ? Is it very risky stuff that can get wiped out instantly ? Or are people being exploited to provide such returns, child workers or something ?

Many 401K's are invested in the stock market. The market is up about 20% this year.


User currently offlinevarigb707 From , joined Dec 1969, posts, RR:
Reply 17, posted (1 year 3 months 2 days 2 hours ago) and read 1400 times:

Quoting JoePatroni707 (Thread starter):
I have about $5,000 in credit card debt. I am thinking of taking a 401k loan at 3% and spreading it out over 24 months.

If you have enough to borrow off your 401K, I say : do it. I did borrow from it, a few times and never regretted.


User currently offlinelevg79 From United States of America, joined Sep 2003, 995 posts, RR: 0
Reply 18, posted (1 year 2 months 4 weeks 1 day ago) and read 1274 times:

Quoting type-rated (Reply 13):
Now a withdrawal is a different animal. You pay a tax on it and then an additional 15% penalty tax to the IRS if you are under age 591/2

Guys, let's not make statements about something we're not familiar with. When did early withdrawal penalty get this high? As an IRS licensed tax practitioner let me give you some pros and cons to borrowing against your 401k:

Pros:
1. No tax effect as long as terms of the loan are followed, i.e. payments made on schedule
2. Any interest paid is actually added to your 401k account, not paid to a third party such as your credit card company

Cons:
1. There is a borrowing limit defined by your plan, in a lot of cases that I've seen it's usually half of your vested balance
2. Requirement to pay off the loan. In most cases if you happen to leave your employer (termination/resignation/lay-off) then you will not be allowed to repay the loan anymore, which will reclassify it as a loan treated as distribution and you will pay tax on the amount outstanding plus the early withdrawal penalty of 10% of the amount owed as long as you are not old enough to retire.

With that being said, if you are able to pay back the loan and it makes financial sense you can borrow against your retirement. However, you should review your financial situation to make sure you'll be able to make payments on your loan. As previously discussed failure to pay it off will result in deemed distribution which in your case would be reported to IRS on Form 1099-R with codes 1L (or L1, same effect). This will make the amount taxable to both, the IRS and California at your income tax rate. Keep in mind that this will count as extra income and might throw you into a higher tax bracket. There is no way to avoid taxes unless your account was funded with after-tax money. In addition at your age you will have a federal 10% penalty on early withdrawal which when combined can be as much as 40-50%. I've seen a lot of people cash out their retirement accounts to pay bills and then got stuck with tax bills they couldn't afford. So make sure whatever the terms of your loan would be that you'd be able to make those payments. Otherwise borrowing from your retirement should not be an issue. If you would like a more detailed advise please feel free to message me in private.

Leo.



A mile of runway takes you to the world. A mile of highway takes you a mile.
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