Take loan out of retirement to get rid of CC debt?

[ghuss37]

I am 24 and have been in the workplace for 1.5 years now. I have around $12000 in my S&SP 401k. It recently occurred to me that I could take a loan out against his (max 50%) at 5% interest for 6 to 54 months. I am looking for advice if I should take a $6000 loan out and pay off all of my CC debt. I currently have about $6000 of CC debt. 3/4 of it is at an interest rate of 9% and the rest is at 13%. The loan would be repaid through automatic payroll deduction.

This seems like a good idea to me, but I am looking for some advice from some smarter people than me. I am eager to get out of CC debt, then pay off my $7000 car loan, and finally the $30-40k of student loans. I believe I can do this within 5 years but I want to minimize the amount of interest I pay.

[maat55]

This question requires much more information. What are your expenses and income? I personally, would never touch a 401k or roth for debt reduction if you can tighten your budget and payoff the debt within three to four years.

This is not the economy to be flirting with jobloss.

[JoshuaHeckathorn]

I agree with Maat55. I would never touch the 401K. My guess is that you could pay off this $6K rather fast through more disciplined spending and better budgeting. If you have good credit, you could always get a 0% interest credit card (there are several now offering 21 months no interest), transfer the balance, and pay off the credit card debt at no interest during the 0% promo period.

[pfguru]

Yes i whould take out loan from 401k and payoff credit card loan ,you are still young so you can rebuild your 401k,now remeber if you dont control your spending you will be right back in this situation very quickly so its very importent to cutoff that card and through it away and start using cash for evey thing.I whould not aplly for any new credit card at all and start building cash reserve right a way in saving account ,and as far as paying back 401k i will do it slowly you are only paying that intrest to your self ,and the way stock market is going i dont think you will miss any upside.

[cschin4]

I would focus on the CC debt. Work some OT, cutback, etc. If that doesn't work, then take out from the 401K but ONLY if you are not going to rack it back up. As for the car, leave it be and just pay it off on schedule. Don't prepay. Why? Because having a car payment is a very good incentive against new car fever. And, you arent' going to gain much by paying it off. As for you loans, i think you should systematically work on those. I would really want to knock those out of my life asap. People say not too because of "low interest rates". But, i hate debt and i wouldn't want 40K hangning over my head. You are young, so this will all take time. Be patient and just start chipping away at that. For now, CC first.

[disneysteve]

Originally Posted by ghuss37

I am looking for advice if I should take a $6000 loan out and pay off all of my CC debt.

Absolutely not! Just totally wipe out of your mind the fact that 401k loans even exist. Unless you find yourself in some catastrophic situation and that's the only money that can save you, don't even think about it.

In 1.5 years, you've managed to save $12,000 in your 401k. That's $667/month. I would much sooner see you temporarily suspend your contributions. In about 10 months, you'd have the CC debt repaid and could restart the 401k contributions. This is NOT my top recommendation but I think it would be far better than taking money out.

My top recommendation is to review your budget (I suspect you may not have one) and find ways to trim expenses and free up cash to put toward the debt. If you'd like, the standard advice around here is to post your numbers. List your monthly income, expenses and debts with balances, interest rates and minimum payments. The folks here will be happy to objectively point out where you are going off track.

[creditcardfree]

Originally Posted by disneysteve

In 1.5 years, you've managed to save $12,000 in your 401k. That's $667/month. I would much sooner see you temporarily suspend your contributions. In about 10 months, you'd have the CC debt repaid and could restart the 401k contributions. This is NOT my top recommendation but I think it would be far better than taking money out.

I agree this is a much better scenario than taking out a 401k loan.

[minnie1928]

Originally Posted by disneysteve

Absolutely not! Just totally wipe out of your mind the fact that 401k loans even exist. Unless you find yourself in some catastrophic situation and that's the only money that can save you, don't even think about it.

In 1.5 years, you've managed to save $12,000 in your 401k. That's $667/month. I would much sooner see you temporarily suspend your contributions. In about 10 months, you'd have the CC debt repaid and could restart the 401k contributions. This is NOT my top recommendation but I think it would be far better than taking money out.

My top recommendation is to review your budget (I suspect you may not have one) and find ways to trim expenses and free up cash to put toward the debt. If you'd like, the standard advice around here is to post your numbers. List your monthly income, expenses and debts with balances, interest rates and minimum payments. The folks here will be happy to objectively point out where you are going off track.

Totally, 100% agree.

[skydivingchic]

As you can tell from the replies, none of the regulars on this forum are fans of taking 401k loans or cashing out retirement accounts to pay off debt. It is a bad idea. One thing that hasn't been mentioned specifically is what happens if you take out the loan and then lose your job. If that happens, whatever amount has not been paid back must be paid back immediately or you will owe taxes plus a 10% penalty for early withdraw on that amount. Assuming the 25% tax bracket and $6,000 borrowed, that is to $2,100 worth of tax and penalty (less whatever portion had been paid back).

As others have said, post your income, expenses, and debts (with interest rates, balances, and minimum due) and people here can give it an objective look. Most people don't have an income problem - they have spending issues. If you are serious about getting out of debt, we can certainly help set you on the right path. Borrowing money from a retirement account is rarely the right path - forget that option even exists.

[ghuss37]

Originally Posted by disneysteve

Absolutely not! Just totally wipe out of your mind the fact that 401k loans even exist. Unless you find yourself in some catastrophic situation and that's the only money that can save you, don't even think about it.

In 1.5 years, you've managed to save $12,000 in your 401k. That's $667/month. I would much sooner see you temporarily suspend your contributions. In about 10 months, you'd have the CC debt repaid and could restart the 401k contributions. This is NOT my top recommendation but I think it would be far better than taking money out.

My top recommendation is to review your budget (I suspect you may not have one) and find ways to trim expenses and free up cash to put toward the debt. If you'd like, the standard advice around here is to post your numbers. List your monthly income, expenses and debts with balances, interest rates and minimum payments. The folks here will be happy to objectively point out where you are going off track.

I have been keeping a budget with You Need A Budget software since January. It has helped me from overspending and getting myself into more debt, but I am still not making any headway on my credit cards.

I have saved $12000 in 1.5 years, but that is with the company match. I put in 8% and then they put in 4% (max). I think it would be silly to not put in 8% and get the free money.

There is little to no chance of me losing my job. I am extremely secure with regards to that.

I will post my expenses when I have a little bit more time to get the most up-to-date information. My living situation is going to be changing shortly as I am moving for work. My living expenses are actually going down because I am going to have a few roommates.

[disneysteve]

Originally Posted by ghuss37

I have been keeping a budget with You Need A Budget software since January. It has helped me from overspending and getting myself into more debt, but I am still not making any headway on my credit cards.

Good for you. That's the most important first step - knowing where every dollar is going.

If you aren't making progress on the debt currently, you either need to cut spending farther and/or boost income. You can't borrow your way out of debt. Shifting the debt from owing the credit card company to owing the 401k plan might reduce your interest rate but it does nothing at all to reduce your debt.

Cut spending, sell stuff, get a second job. Do something to free up or generate more money that can be put toward the debt.

My living expenses are actually going down because I am going to have a few roommates.

Great, so every penny that you will be saving should go toward debt repayment.

[ghuss37]

The only reason I considered borrowing from the 401k was because the repayment money would be deducted from my payroll and I would never see it. This would make it easier for me to budget and I won't be racking up anymore debt. Secondly, I will have my credit cards taken care of at a lower interest rate. It would also be a motivation to me to see those things gone. I know this sounds terrible, but I really don't care too much about retirement at this point...who knows if I will even be here tomorrow.

[Petunia 100]

The chances are very good that you will be here tomorrow. When you are too old to work, you will still be YOU. (When I was your age, I thought if I was old someday, that would be a different person. But just as you are still the same person you were at age 4 and age 14, 74 year old you is still you.) When you are older, you will still like to eat, live indoors, and see a doctor when you need one. You will not be able to afford these things by magic. Do not raid the tiny nest egg which has just begun to grow for you. You can NEVER catch back up (once you take the money out), that is how compounding works.

Watch your spending, reduce your debt. Kudos to you for taking action while your credit card debt is still very manageable.

[snafu]

Should you be eligible for a 0% interest CC, it would reduce the all-in sum to transfer the balance to a new account. Since there is an awareness campaign just now, everyone is being encouraged to review the fees and holding in their own 401K?

[ghuss37]

I actually thought about trying to do a balance transfer. Unfortunately, I do not qualify for any credit cards it seems like. I have been denied a couple times because the ratio of my credit used to credit available is not good. I also recently had one of my credit cards decrease my credit available. Otherwise, my credit score is ok (730).

[BuckyBadger]

Originally Posted by ghuss37

The only reason I considered borrowing from the 401k was because the repayment money would be deducted from my payroll and I would never see it.

So do this, but for the CC debt. Have a nice chunk automatically deducted from your account the day after you get paid. Have this go right to pay off the credit card.

It's a lot smarter than borrowing against your retirement.

Then, if you find that you can live comfortably on what you have left over, keep making this deduction even after you pay off your cards and direct it somewhere else -- savings, investment, more retirement...

Always remember to pay yourself first.

[Hector]

In doing so, you are making sure that you won’t change the job. I won’t do it.

You have student loan, CC debt, card debt – I think you should not touch 401k and be discipline in getting rid of these loans. To me, CC debt and card loan are results of non-disciplined spending in most of the cases. If that is the case with you, you are better off paying it off with discipline. It will teach you to be more responsible, where if you take loan from 401k, you wont learn as much.

I would stop contributing in excess to company match and will focus on being debt free.

[Hector]

Originally Posted by pfguru

you are still young so you can rebuild your 401k

I think its tough to build retirement savings with this mentality.

[Hector]

Originally Posted by disneysteve

In 1.5 years, you've managed to save $12,000 in your 401k. That's $667/month. I would much sooner see you temporarily suspend your contributions. In about 10 months, you'd have the CC debt repaid and could restart the 401k contributions.

This is good for psychological boost, but this 667/month is pre-tax money. Also there might be company match in it.

Originally Posted by ghuss37

I put in 8% and then they put in 4% (max). I think it would be silly to not put in 8% and get the free money.

Agree. I would continue contributing to get match.

[ghuss37]

Originally Posted by Hector

This is good for psychological boost, but this 667/month is pre-tax money. Also there might be company match in it.

Is it pretax if it is a Roth IRA? I thought I already paid my taxes on what is in my S&SP.