Pros and Cons of Using a 401k Retirement Plan Loan to Pay Off Debt

Your retirement plan loan is one of your hidden sources of money. If you need money for emergency purposes the 401(k) plan is 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 can 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 decide 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 401k 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 lending 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 before 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.

However, borrowing money from your 401k plan isn’t always a bad idea. The resource can help you figure out if it’s the right move.

401k Loans 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 tap your retirement plan you are actually increasing your financial risks by securing unsecured credit card debt.

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

Pros and Cons of Using a 401k Retirement Plan Loan to Pay Off Debt was last modified: June 20th, 2014 by Paul Sarwana
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