Should I Borrow From My 401K To Pay Off My Credit Cards?
Brian V. Lee Bankruptcy Attorney www.Lee-Legal.com
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If you are struggling with credit card debts, you may be looking for any possible options available to you in order to resolve your debt issues. One option you may consider if you have money invested in a 401K is to try to access that money and use it to repay your credit card debts. Taking money out of a 401K to repay debts is a very bad idea and is something you should pretty much never do, since you put your retirement at risk and you are hit with large taxes and penalties for early withdrawal. Because of the huge consequences associated with actually withdrawing from a 401K, many people who look to this retirement account to help them pay debts will instead consider borrowing against their 401K. In general, you are permitted to borrow money from the 401K
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Taking money out of a 401K to repay debts is a very bad idea and is something you should pretty much never do, since you put your retirement at risk and you are hit with large taxes and penalties for early withdrawal ●
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account that you have, so you could technically pursue this as an option to repay your credit cards. When you borrow the money, you do not have to pay penalties and taxes as you would when you withdraw the cash- although you do have to pay interest on the loan. The fact that you don’t have to pay penalties can make it seem as if this is an attractive choice fro debt repayment, especially since the money is just sitting there. The reality, however, is that this is almost as bad of an idea as it is to just withdraw money to pay.
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Borrowing From Your 401K Puts Your Future in Jeopardy There are a lot of reasons why borrowing money from your 401K is a very bad choice to repay your credit cards. One of the biggest issues is that if you lose your job or need to make a change in your employment, you may be required to pay back the 401K loan in full. If you have already used the cash to repay your credit cards, you may not have the money
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One of the biggest issues is that if you lose your job or need to make a change in your employment, you may be required to pay back the 401K loan in full. ●
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to pay back the loan. This can put you into a situation where you end up losing out and needing to pay penalties since you cannot repay the loan as required. This can put your future retirement security in huge jeopardy as you could lose a good chunk of your retirement savings as a result. Another problem with borrowing from your 401K to repay your credit card debts is that the money is no longer in your retirement account working for you. When you invest your money in a 401K, the money is supposed to grow so you have enough to pay to support yourself in your old age. If you take the money out of investments, you’ll lose the growth, which
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When you invest your money in a 401K, the money is supposed to grow so you have enough to pay to support yourself in your old age. If you take the money out of investments, you’ll lose the growth, which compounds over time. ●
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compounds over time. You will never get back the months or years of growth that you lost during the time when your money wasn’t invested,
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which can mean you will need to delay your retirement or end up with a skimpy nest egg that doesn’t necessarily see you through your golden years.
Bankruptcy Protects Your 401K, But Not 401K Loans Outside of the risks of losing your job and not being able to repay your 401K loan, there are also other problems with borrowing from your retirement account as well. Another problem that occurs if you take a loan against your 401K is that you may find yourself needing to file for bankruptcy anyway. When you are in deep enough debt that borrowing from a retirement account seems to be your only option, there is a good chance that a bankruptcy filing is an inevitable eventuality. If you do end up filing for bankruptcy anyway, you’ve taken the 401K loan out for no reason, cost yourself retirement money and put your future in jeopardy- all for no benefit. The bankruptcy code protects your retirement accounts whether you file for chapter 7 or chapter 13, so if you just file in the first place, you won’t put your financial future at risk by using your retirement accounts to make a hopeless debt repayment effort.
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Bankruptcy after taking a 401K loan will also, in many situations, have a worse outcome than if you had filed for bankruptcy before taking the loan. If you have taken a loan against your 401K, the trustee in your bankruptcy proceeding may not necessarily allow you to repay that loan as a part of a chapter 13 repayment plan. This is because the money you would need to use to pay yourself back would thus be diverted from other creditors who are entitled to repayment under a chapter 13 filing. Thus, while bankruptcy normally would have protected your 401K, the fact that you took the loan out could end up with your retirement account being put into jeopardy.
Making Smart Choices About Debt Repayment The inherent problems associated with using a 401K to repay credit card debt are illustrative of the complexities of debt
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The inherent problems associated with using a 401K to repay credit card debt are illustrative of the complexities of debt repayment. What may seem like a good idea and a responsible choicetaking a lower interest 401K loan to try to repay debts that are higher interest- could actually end up backfiring and hurting you. ●
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repayment. What may seem like a good idea and a responsible choice- taking a lower interest 401K loan to try to repay debts that are higher interest- could actually end up backfiring and hurting you. You don’t want to find yourself in this situation, which means you should always consult with an experienced debt relief and
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bankruptcy lawyer if you have debts you do not believe that
About the Author
you can handle on your own.
Serving clients in the DCmetropolitan area since 2005, attorney Brian V. Lee is licensed in Virginia and the District of Columbia. He is also licensed to practice in Maryland federal and bankruptcy courts. Brian provides client-oriented legal counsel to businesses and individuals on a wide variety of complex legal and financial issues. Brian Lee runs Lee Legal, a full service bankruptcy and litigation law firm with offices located in Washington, D.C. (DuPont Circle) and Virginia (Old Town Alexandria). Lee Legal provides skilled, comprehensive bankruptcy and litigation representation. Every client receives a free initial consultation. Locations: 1800 Diagonal Road Sixth Floor Alexandria, VA 22314 (703) 879-2870 1250 Connecticut Avenue NW Second Floor Washington, DC 20036 (202) 448-5136
www.Lee-Legal.com
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