Taking out a 401k loan to pay down debt

[Beemer]

I agree Dave Ramsey is not the be all, but I do like his logic. I think it is far better to buckle down, make extra payments, get a extra job, etc. way before I would touch my 401k. Just my opinion though.

 

[leftsock]

Dave Ramsey, while a smart man, is selling a product and he isn't the be-all, end-all of financial advise. He is there to coach people that have finance problems or don't understand finance very well. For many his information is very dumbed down. It's great for the beginner where too much, in-depth talk will confused them. This topic is in-depth.

Agreed. Dave's target audience are people who are in debt, who don't understand their finances, and who need beginner-level help. I might think that someone who is considering a 401k loan to consolidate/move their debt needs his kind of beginner's help.

Even if OP's "friend" doesn't want to follow Dave's plan, they might get some good ideas from what he has to say.

 

[boozoo]

Ive done a 401K loan before, but only because I needed a very fast fat wad of cash to cover my arse until my GTX sold. Was paid back in full in a month.

I wouldn't use the 401K loan as a debt consolidation - I'd find some other way to do that. It's always helpful to get off of sky high credit card interest rates, but there are other ways to accomplish that.

Only other way I'd rob my 401K is if I get laid off and have to do something to keep the bills paid.

 

[KJQ6945]

Ive done a 401K loan before, but only because I needed a very fast fat wad of cash to cover my arse until my GTX sold. Was paid back in full in a month.

I wouldn't use the 401K loan as a debt consolidation - I'd find some other way to do that. It's always helpful to get off of sky high credit card interest rates, but there are other ways to accomplish that.

Only other way I'd rob my 401K is if I get laid off and have to do something to keep the bills paid.

If I had a 401k worth anything in the 80's I would have bought several GTX's!
Shoulda, woulda, coulda.

 

[snapping turtle]

Right now the Stock market looks to be growing,

So are my expenses and overall outlay of cash so in my opinion inflation rate is going to increase, Watch gas prices for inflation and Milk/beer and Bacon. Just my thoughts.

Regular debt (House and car/truck) is OK right now if inflation is increasing. (NO Dave R here) 10,000 in todays money paid back as 10k plus intrest (10k= 13 K in inflated goods prices) make sense cause you are paying back dollars that are worth less tomarrow than they are today. This is only good if you get in before the inflation rate hits high fast. Only on normal debt.

Credit Card debt is different. It is not Regular Debt it is bad debt. Many credit unions offered CC buster loans to help out quicker. Mine last one is 6.5 % where the CC was 17%. (Emergency new house appliance purchase / emergency car repair at same time) I should have had more in the emergency fund to begin with.

I expect stock to rise till the early fall and a slump till next fall. Earnings reports should show when the market is starting to slump.

Hold out till fall and do all you can to pay down the CC till then.

When you see weak earnings reports from several fortune 500 companies in different industries get the 401K loan to cover the rest of the CC debit and you might find that your intrest to yourself on the loan is the major money maker in your 401k for a year.

If you go this route pay more into your 401k to cover the loan.

 

[Mango]

I've actually done this.

In my situation, there are no tax implications. The interest rate was 3.75% paid back in to my account. It was about 6% of my total account, and I justified it by looking at it like a re-balancing of assets. If I would put that money in a bond fund making 1%, why wouldn't I repay myself 3.75% tax free? Compared to the people who are taking a full income hit + 10% because they think someone is going to confiscate their 401k, it's a better play.

 

[roisigns]

If SHTF, what good would a bank balance be? Better to have tangible survival stuff in that situation.

If SHTF and banks collapse, my credit card balance will probably never get paid.

There is a term used in the military: OBE. It stands for “overcome by events”. What it means is that one or more events have occurred which have made the original problem or idea go away and usually not by design.

 

[maxmayhem]

401k debt is not debt...you can generally borrow up to half of the value of your 401k ...you will be paying yourself back the interest.this should be fine and the interest and fees will be lower than your credit card payments...DO IT!.you can get a guaranteed return by paying off your credit cards but you could lose money in the market as well.

My opinion, NO.

Moving debt from one place to another is not paying it off!

I don't care who your are paying the interest to, the goal should be to pay NO interest. The bad taste in your mouth from giving a bank your money should be a lesson no to do that in the future. Pay the interest and learn the lesson.

Unplugging money from an investment account also "costs" you money. Leave it alone.

If for some reason, you don't pay it back, now you are stuck with a tax penalty as well. Don't mess around with the IRS, deal with banks.

In summary, NO.

 

[TiminMishawaka]

<-----This guy.

Who manages the fund? I want in on an IRA that's doing that well.

 

[TEK]

consider this. unsecured credit card debt gets flushed down the toilet in most personal bankruptcies, whereas, tax qualified plans are protected.

so it would be, ah, questionable, to strap credit card debt against your 401k or even your home equity-- unless it was just a tiny amount of debt.

for people with a lot of cc debt they should consider BK before they go tying up equity and 401ks.

 

[PistolBob]

If you do decide to take from 401k, be prepared to face the tax fees and other penalties. There are down sides. I would hate to see you wait to pay the taxes until the following year...it can get nasty with the IRS.

There are no penalties or fines for taking out a 401K LOAN.

 

[PistolBob]

I have no credit card debt...but I am considering taking out enough money from my 401K to pay off my house and just eating the penalty. I figure the 401K isn't that good of an idea anymore and sooner or later the feds are going to grab it away from me anyhow.

My cash in the mason jars has had a higher rate of return than most stock and bank investments.

 

[Hotdoger]

There are no penalties or fines for taking out a 401K LOAN.

Yes there are if he fails to pay it back.


Also if he loses his job he owes the whole amount taken out. There is no payment option other than full if that happens.

 

[Hotdoger]

As part of my preps, I need to get out of financial debt.

So, a "friend" has some significant credit card debt. This friend can pay off this credit card debt by taking out a loan against his 401 plan. What this means is that the friend will have to pay back into his 401 to pay off the 401 loan. The interest paid on the 401 loan goes back into the 401 as well.

What's the down side here? The interest on the 401 loan is much lower than interest on credit card. The interest paid on the 401 loan goes to my own 401, not to the banks as in credit card interest.

All of my 401 is tied up in paper instruments (stock). If the market crashes, much of that value would be lost anyway, and if I didn't take out the loan, would still have the credit card debt.

My job is very secure.

Should I or shouldn't I?

No you should not. .
The root cause of your problem is a spending issue and until you long term address those issues borrowing from your 401k does nothing to change those issues.
Get on a written budget. Change your lifestyle and do everything to payoff your debt.
By changing you actions you will better prepare yourself for the future.

I changed my life before Obama was elected. It has made for a much better life.

 

[andski3]

I had high credit debt from when I was on active duty. When I separated to the reserves and got a civilian career, I started a 401k. However after 2yrs of dumping as much as possible into my 401k I got tired of paying the credit card interest rates. I pulled a loan out of my 401k to pay off all but one of my credit cards.
The money I was saving on my monthly credit payments, I put half the money to paying my 401k loan off faster and the rest to my last credit card. After all, I was already paying that much a month. After a year I was credit card free, and after 28months my loan was repaid.
So IMHO, if your job is secure, I would definitely look into this option. It still takes work. But now every time I get a raise or promotion I just increase my 401k contributions. After all, I am used to my standard of living, so why increase it just because I make more. I'm 30, so I think I have plenty of time to make up anything I lost in "potential" investment earnings.

I am not a finacial advisor.....

 

[rockhopper46038]

Who manages the fund? I want in on an IRA that's doing that well.

Self-directed IRA. Mixture of commodities, REITs, Energy MLPs, high beta leveraged index funds, and individual stocks. YMMV.

Full disclosure, my CC debt is at a fixed 2.99%, so the bar isn't particularly high.

As a tool the loans can be useful, but its best to have a pretty good understanding of the ins and outs before taking one.

 

[Tactical Dave]

 

[Paul30]

As many have stated, there are benefits and risks. The benefit is you will not be paying high interest rates which is money you will never get back. You will be paying this interest to yourself, so it is virtually a free loan. Some will point out that you will not be making money on your investment because you have it pulled out and this is true. Questions is how much were you making on it anyway? If it is only making 1% and you are paying 18% to a credit card company then you are gaining 17%. Any interest you pay to yourself comes from one of your pockets and goes into the other so it is really a wash. The danger is should you lose your job and can't pay it back it will be considered an early withdraw with a 10% penalty, in addition to you paying taxes on it as regular income. On the other hand, with the country going bankrupt the odds of taxes in the future being much higher to support all the programs is pretty good. If you had to gamble on paying taxes on them now, you might come out a head but no one knows the future. I know very little about financial matters, so please consult a professional before acting on anything I post here on the matter. I did however stay at a Holiday Inn Express once though.

Another point, a 401K is relatively judgement proof. If you ever found yourself filing bankruptcy, you could probably discharge credit card debt and other debts without worrying about them taking your 401K money. If you elect to pull the 401K out and pay off things, you have pulled this money out of a protected status and in a bankruptcy these items would be fair game to those you owe. This goes for divorce type proceedings as well.

 

[Turf Doctor]

Alot of ides here, some good and some not so good.

Lets say you borrow from $1000.00 your 401k. When you borrow the money there isn't any fees. Remember though, when you contributed the the fund it was before tax dollars. When you pay the money back it is after tax dollars. So whatever tax bracket you are in, lets say 20%. Now lets move forward to retirement and you want to take money from your 401. You will pay taxes on the money you receive at the current tax rate. So you will pay taxes again on the money you borrowed and paid back. Remember the money you paid back to the 401 was taxed at 20%.

Now the loan doesn't look as good as it did when you took it out.

I am not a tax advisor, but I would encourage you to talk to a financial person that can explain this better than I can.

In the end, people have their ways of justifing what they do, the market is down, the gov. will eventually take it anyway..

My point is I would rather folks keep as much as they can legally without having to even pay one more dollar to the gov.

Just my ..

This is somebody to call
Core Wealth Advisors
Brad Good
317-497-0569 ext.102

 

[LP1]

I haven't read all of the posts, so my apologies if this has been covered.

In addition to all the good reasons that have been posted regarding why not to do it, here's another one.

Regardless of your age, it's never a good idea to tap your retirement funds early, unless it is literally to keep you from starving. Don't do it for credit cards, don't do it if you fall behind on mortgage or rent (unless I'm your landlord), don't do it to pay for your kids' education, just don't do it period.

Most importantly - Get some qualified financial advice (lawywer or CPA) - Credit card debt is unsecured. If you ever went into bankruptcy, it goes away, but I think that your retirement funds are more difficult to lose. Again, IANAL - get qualified advice.