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Considering Getting a 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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