401(k) Retirement Plan Loan for Debt Relief

Your retirement plan loan is one of your hidden sources of money. If you need money for emergency purposes the 401(k) plan may be available to you in the form of a loan. Even though 401(k) pension plan is designed to grow continuously for retirement money you are able to borrow from the funds available in your retirement savings.

If you are deep in debt you might be wondering whether tapping from your 401(k) plan loan is a good option to pay off your credit card and other debts. To determine if your retirement plan is best for debt relief always compare the overall cost of this loan with other loans to consolidate debt before you consider borrowing from your retirement funds.

The Cost of 401(k) Retirement Plan Loan

Borrowing from your pension plan is easy and convenient. There will be no credit check and most plans lets you borrow, for any reason, up to 50 percent of the amount in your plan or $50,000. What's more you could receive a loan in days at the prime rate plus one percent or two rate of interest.

Be aware that in these loan schemes you might lose a lot of money because of potential returns, taxes and penalties. Once you withdraw money from your retirement plan you will owe taxes on the loan amount plus a 10% early-withdrawal penalty prior to age 59 1/2. You will also lose its potential returns and all of its future's tax-deferred compounding.

The consequences are even worse when you leave your current employer and you have an outstanding plan loan. If you lose your job the loan will become due and payable immediately and the defaulted loan will be treated as a distribution. Depending on your tax bracket, you could pay the government up to half of the defaulted amount.

Retirement Funds or other Debt Relief Options?

Interest wise, withdrawing money from retirement savings is a viable option to pay off your debts. But the taxes and penalties costs can make you sink faster than other loan options. Also, when you borrow from your retirement plan you are actually increasing your financial risks by securing unsecured credit card debt.

So, consider getting other loan options before you tap your 401(k) retirement plan loan to pay credit card debt or other mounting bills. You may also be able to negotiate with your creditors by yourself or with the help of a credit counselor to have interest rates and minimum payments lowered.

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