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

[BuckyBadger]

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]

you are still young so you can rebuild your 401k

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

[Hector]

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.

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]

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.

[jteezie]

Nice Scenario. I've actually seriously done some calculations and even considered writing up a business plan for this type of 401k loan strategy. Here is the caveat. Where do you think the stock market is going over the repayment period?

This is a great strategy if you expect the markets to go down because you guarantee yourself a tax free 5% growth (or whatever rate depending on your company's rules). So the benefit is the difference between 5%, the lost market value from general downward market movement, and the tax benefit of that difference.

However, if the markets go up, you miss out on some gains in excess of 5%.

Another way to look at the above spreads is: a 0% loan to pay off a 9% interest rate seems good, but that 0% is really the lost earnings potential between the 5% and the true market movement.

Does that make sense? I didn't double check all the logic because it's late.

[disneysteve]

you guarantee yourself a tax free 5% growth

How do you figure that? If you take a loan from your 401k, you are losing potential growth. That money is out of the account not earning any income or growing at all. Plus, you are PAYING interest on the loan.

[kork13]

Ghuss, one MAJOR factor that hasn't been mentioned yet.... if this is a standard (pre-tax) 401k, you're taking money out of your 401k pre-tax, and paying it back with AFTER-TAX dollars! And then, when you withdraw that money in retirement, you'll be taxed on it AGAIN! So instead of paying 5%, you're actually paying 6.5%-7.5% (depending on your tax bracket).

I would strongly recommend AGAINST doing the 401k loan. It's like Pandora's Box, starting down the slippery slope of considering your 401k to be your backup in case things don't go to plan. You can't use your retirement account to solve your problems. That's a road to failure. Your retirement funds need time to grow, and taking out 401k loans will NOT let that happen.

Try looking at any of the cards listed here for doing a 0% balance transfer. Most of them offer 0% rates for 12-21 months on balance transfers, which will give you plenty of time to knock out your credit card debt, or at least reduce it significantly. If you were to do a balance transfer, how much would you be able to pay toward your CC debt each month? $500? You'll have it gone in 12 months. $350? It's gone in 18 months. COMPLETELY DOABLE, and a much better option than a 401k loan.

[jteezie]

Steve,

it is not a loan in the traditional sense that you understand it because you are paying yourself. That interest does not go to some bank as a convenience charge.

Please read the rest of my post. I state that the interest free loan perspective only applies if you expect market downturn. Otherwise, there is risk of losing out on potential market returns. However, if his CC interest is like 20%, money left to earn lets say 10% return on the 401k is a worst situation than losing 20% on the loan.

You have the right logic, just look at more variables.

[Hector]

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

Nope. Only regular 401k and regular IRA are pre tax. Roth is not.

[maat55]

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.

You need to learn self-control. Part of succeeding financially is being able to handle your money yourself.

Personally, I would stop contributions to your 401k that are over the match and use the balance to pay the debt. After the debt is gone, then raise your contributions or open a Roth(if you qualify).

[jteezie]

You need to learn self-control. Part of succeeding financially is being able to handle your money yourself.

Personally, I would stop contributions to your 401k that are over the match and use the balance to pay the debt. After the debt is gone, then raise your contributions or open a Roth(if you qualify).

Please do not stop contributing to your 401k. You do not want to throw away the free company match.

[jpg7n16]

Please do not stop contributing to your 401k. You do not want to throw away the free company match.

The quote you have from Maat has it right. Stop contributing above the match.

Don't stop the entire contribution - only stop the amount over the match until you're out of high interest debt.

[FoolFromAZ]

I have done it myself. I had around 50K of CC debt yr ago. After I short sold my home, my interest rate on my cc debt went over 15% per annum. I was really worried as I way paying a lot on intrest. I was also until then hesitated to take 401k loan. then later on thot, I did not have any other way as intrest rate was very high. We had around 50K in our 401K, we took 25K loan from that for 5% per anum intrest rate. Also we maxed out our 401K contribution as well to bring down my MAGI, we only get 6% match, but we still contributed 16.5K per year towards 401K. Now last month we again were able to get 20K from our 401K as a loan and paid of remaining 20K credit card balance as we had paid of nearly 5K in the last 1 yr as paying extra payment to our CC. Now we dont have any cc debt. But our 401K balance is 90K (combined with close to 45K as loan). Our 401k portfolio is 45K on mutual funds + bonds and rest 45K as a loan (5% intrest rate that we pay). Yes we would be missing the opportunity if stocks go up like more than 15% or so. but the way the market has been. We thought we did not miss anything and no more credit card debt which is a big relief and we are really not guilty of paying intrest to our current 401k loan as the intrest is going towards our account. We get lot of extra cash now even after our paycheck having lot of deductions. (401k contribution, roth ira, 401k loan, etc.,).

Me and wife together make 170K per yr + i get up to 10K of yrly bonus. our 2008 honda odysey is paid of. We still have 5K loan on our second honda accord which we bought only 2 months ago. We lost some money in our house. We put down close to 45K in that house, eventually we had to short sell it, which completely screwed up my credit. We had to move to small house now which we are renting. Now our goel is pay off the 401k loan and at the same time save cash for next few yrs and try to buy a home for 150K.