With the Solo 401 (k) having $50,000 in it, they take out $25,000 from the account and use that $25,000 to pay off the credit card debt in one shot. Is it a good idea to consolidate your debt? 3. “They should do both, even if it’s only putting the minimum amount in their 401k,” he said. What is a 401k … Those participating in 401(k) plans may contribute up to $19,500 this year, according to the IRS, plus another $6,500 in catch-up savings for workers age 50 and older. People like it as it’s a quick solution to get extra cash. If you have 30 years until retirement, that missing $666 could have grown to $5,407, according to NerdWallet’s. Money taken … Just make sure this consolidation is part of a larger plan to get out of debt and you don’t run up new balances on the cards you’ve consolidated. Pre-qualified offers are not binding. If you’ve weighed the risks and decided to use a 401(k) loan to consolidate credit card debt, keep these points in mind: Take a 401(k) loan only if you know how you got into debt in the first place and aren't likely to be in the same position again, Stop using credit cards as you pay off debt, Continue contributions while you repay the loan — at least, enough to capture any company match offered by your employer — if your plan allows it, Limit the loan to an amount you can confidently repay in a short period of time, such as 12 months or less, Mackie says, Borrowing from a 401(k) plan to pay down high-rate debt “is only as good as not getting into debt again,” says Scot Stark, a certified financial planner in Freeland, Maryland. Because using your retirement fund for anything other than retirement can come at a big cost. Many or all of the products featured here are from our partners who compensate us. Unlike consumer debt, a 401(k) loan isn’t forgiven in bankruptcy. Our opinions are our own. If you’re carrying balances on credit cards with oppressive interest rates, you could come out ahead by taking a low-interest 401(k) loan. Disclaimer: NerdWallet strives to keep its information accurate and up to date. Making a couple of financial tweaks or lifestyle changes can give you the extra cash you need to pay off those credit card … This is usually the cheapest option for those who qualify. However, a failure to replenish deposits may drastically influence your financial situation after retirement. Just make sure this consolidation is part of a. to get out of debt and you don’t run up new balances on the cards you’ve consolidated. Here's everything you need to know, Pros and cons of a cash-out mortgage refinance, Today's mortgage rates fall to an unprecedented low | January 22, 2021, Today's mortgage refinance rates drop to a historic low | January 22, 2021. If you can’t pay off the consolidated debt within five years, or if your total debt equals more than half your income, you might have, to consolidate. Employer-sponsored 401(k) plans form a retirement-planning cornerstone for millions of Americans. You also might use a family loan or transfer a high-interest balance to a zero-interest credit card. Student Loan Administrative Forbearance Extends Until October; Here’s How to Turn Your Second Language into a Side Hustle; 8 Ways to Pay Off Retirement Debt (Including Credit Cards) Here are … Our partners compensate us. Debt.org cites other possibilities, including nonprofit credit counseling, which can provide a debt-consolidation plan, or finding a reasonable home equity loan. How to Get Out of Credit Card Debt in 4 Steps. Given those caveats and the need to carefully consider the ramifications, here are some reasons you might turn to your 401(k) to pay off debt years or decades before retirement. 3. Not only will you get hit with penalties, fees and taxes on your withdrawal but you’re also stealing from your own … Plus, if something goes wrong and you miss a payment or lose your job, the costs get even larger. These typically range from six months to two years. So much could go wrong with this strategy,” says Brett Anderson, president of St. Croix Advisors in Hudson, Wisconsin. It’s a relatively low-interest loan option that some people use to consolidate credit card debt — meaning, taking a … The same applies to … Moreover, many people reduce their 401(k) contributions while making payments on a loan from the plan. The next step would be to pay down the 401 (k) loan. Why? If you can’t pay off the consolidated debt within five years, or if your total debt equals more than half your income, you might have too much debt to consolidate. All rights reserved. Many 401(k) plans allow users to borrow against their retirement savings. “Just imagine taking out a five-year 401(k) loan during this current bull market at 30 or 35 years old — it could severely impact your future nest egg,” says Malik Lee, a certified financial planner at Henssler Financial in Kennesaw, Georgia. The advantage … — meaning, taking a more favorable loan to pay off several high-interest credit card balances. 2. The only drawback, assuming you stay at your job, is the missed chance for your money to grow with the market. Financial experts tend to recommend leaving your 401(k) alone and letting the money grow so you’ll have it later in life. , borrowing $10,000 from a 401(k) plan over five years means forgoing a $1,989 investment return and ending the five years with a balance that's $666 lower. Jeanne Lee is former personal finance writer for NerdWallet. About 86% of people who leave their job with an outstanding 401(k) loan default on it, according to the National Bureau of Economic Research, compared with 10% of all 401(k) loan borrowers. Never borrow from your 401(k) to pay off your debt. Minimizing retirement risk from a 401(k) loan. An argument for borrowing (intending to pay back) from your 401k is to eliminate a large debt with a high-interest rate. A 401(k) loan should be used as a last resort; you likely have better options. It’s a relatively low-interest loan option that some people use to. (This assumes that you pay 5% interest for the loan and the investments in the plan would have earned 7%.). ), But the cost to your retirement account doesn’t end there. Property and Casualty insurance services offered through NerdWallet Insurance Services, Inc.: Licenses, NerdWallet Compare, Inc. NMLS ID# 1617539, NMLS Consumer AccessLicenses and Disclosures, California: California Finance Lender loans arranged pursuant to Department of Financial Protection and Innovation Finance Lenders License #60DBO-74812, We want to hear from you and encourage a lively discussion among our users. Assuming you have credit card debt with a high interest rate, using your 401(k) loan provision is a great idea to save on interest and pay down debt… However, this does not influence our evaluations. So they shouldn’t pay off credit card debt at the expense of saving for retirement. Whether you pronounce it eye-ruh or you sound out each letter, an IRA (Individual Retirement Account) is a great tool to build wealth and make sure you retire with dignity. Get a handle on what you owe. Please help us keep our site clean and safe by following our, Prevent identity theft, protect your credit, The difference between term and whole life insurance, How medical conditions affect your life insurance rate, Many 401(k) plans allow users to borrow against their retirement savings. With this option, you repay your own retirement account over time and avoid the early-withdrawal penalty and income taxes. And if you’re younger than 59½, you’ll incur a 10% early withdrawal penalty. Chapter 7 bankruptcy discharges consumer debt immediately. Break the process of paying off credit cards into steps to. A word of caution: If you leave your job before you’ve repaid a 401(k) loan, your company is likely to treat the balance as a withdrawal, which means you’d face income taxes and the potential penalty. More, Break the process of paying off credit cards into steps to find your best path: 1. Market data provided by Factset. Debt consolidation can reduce interest rates as well. (assuming that same 7% return, compounding monthly). Having just one bill to pay may be less … Better consolidation options for smaller debt loads include a: 0% balance transfer card: If you have good or excellent credit, look into a balance transfer credit card with an introductory no-interest period. When evaluating offers, please review the financial institution’s Terms and Conditions. are lower for most borrowers than rates on regular credit cards. Many 401 (k) plans allow users to borrow against their retirement savings. If you suddenly faced a costly medical emergency or another urgent situation that might plunge you into new or greater debt, 401(k) funds could save the day. In short, you should not use a 401(k) loan to pay off credit card debt. Track your progress — and plan for life after debt. Chapter 13 bankruptcy and debt management plans require five years of payments at most. 4. A debt consolidation loan is exactly what it sounds like: A loan … It’s not ideal, especially if you get an … Add up certain types of debt and compare the total to income to see if it's a problem and how to proceed. So how do we make money? Mutual Fund and ETF data provided by Refinitiv Lipper. Here is a list of our partners. About 1 in 5 plan holders have a 401(k) loan, according to Fidelity Investments, a large retirement plan administrator. The Pros and Cons of the 401k Loan. FAQ - Updated Privacy Policy. If you’re at least 59 ½, you’ll avoid the early-withdrawal penalty but will owe regular income taxes on the withdrawal. Track your accounts with NerdWallet to manage it wisely. Say for instance your $40,000 debt is on a credit card at 16% interest. Using your 401(k) to pay off debt to avoid bankruptcy may not be the wisest move, given that U.S. bankruptcy courts generally shield retirement accounts. ©2021 FOX News Network, LLC. But the key word here is retire. See how much extra you can pay over minimums. : 1. We believe everyone should be able to make financial decisions with confidence. In fact, financial expert Dave Ramsey recommended eliminating debt before saving for retirement, even if it means sacrificing a company 401(k) match for a year or two. Employer rules may vary, but 401(k) plans typically allow users to borrow up to half their retirement account balance for a maximum of five years. If homeownership is a priority and you don’t have access to another sizable chunk of funds, a 401(k) loan may be a reasonable option. In fact, some plans prohibit contributions when a loan is outstanding. On the outside, it may seem like a no-brainer to forfeit the 8% a year on your investment instead of paying 16% interest on that debt. A more reasonable choice may be a 401(k) loan, which carries a relatively low-interest rate. See how payment order affects your payoff date. Track your progress — and plan for life after debt. This further damages retirement plans. All credit types welcome to apply. “When employment is stable and a forward-looking budget stands to be reasonable because the major expense that created the debt has ended, then a one-time loan could make sense,” says Joel Cundick, a certified financial planner at Savant Capital Management, in McLean, Virginia. What Is Debt Consolidation, and Should I Consolidate? Any money you borrow from your retirement fund misses both market gains and the magic of compound interest. If you have good or excellent credit, look into a. with an introductory no-interest period. Sponsored by Credible, which is majority owned by our parent, Fox Corporation. It’s worth consulting with a financial professional or lawyer. It might make sense to defy conventional wisdom and dip into your 401(k) for certain situations. “I cringe at the thought of using your 401(k) to consolidate your loans. Bankruptcy and debt settlement can reduce or eliminate credit card debt, but they severely impact your credit. When evaluating offers, please review the financial institution’s Terms and Conditions. Besides saving for the future, employees can lower their current income tax bills by contributing to these tax-deferred accounts. Before borrowing from your 401 (k), crunch some numbers to determine how long it will take you to pay off your debt at the rate you're going and how much interest you'll have paid during that … SHOULD YOU LOWER 401 (K) CONTRIBUTIONS TO PAY OFF DEBT? Even $50 or $100 dollars per month can help you pay more than the minimum on your cards and blast your debt down. We repeat— never borrow from your 401(k)! Get a handle on what you owe. The only situation in which it makes sense to take a 401(k) loan is if you are on the verge of bankruptcy. NerdWallet strives to keep its information accurate and up to date. Sometimes, debt can’t be avoided. (The National Foundation for Credit Counseling recommended that retirement-age people with substantial debt avoid draining 401(k) funds and instead consult with a non-profit debt counselor.). But NerdWallet cautions against taking a 401(k) loan except as a last resort. You can borrow up to half your 401 (k) balance, but no more than $50,000. In some cases, you don’t have to take out a loan to pay off your credit card bills. If you do decide to go through with the 401 (k) loan, I encourage you to increase your payments to $661 per month and pay off the loan in 36 months rather than 60. You can also consider consolidating credit card debt, perhaps with a lower-rate personal loan, to make payments more manageable, Ms. McAvoy said. In this case, you’d be required to take out a 401k loan. Your rate depends on your credit history and income. Drawing money from your 401(k) can come at a cost, which will vary depending on your age and the way you take the funds. If you’ve entered retirement with a mortgage, credit card balance or car loan, it may seem tough to tackle the debt on a fixed income. If you find discrepancies with your credit score or information from your credit report, please contact TransUnion® directly. Even though credit cards charge a lot of interest, the costs and risks of a 401(k) loan make it a bad idea. If you have 30 years until retirement, that missing $666 could have grown to $5,407, according to NerdWallet’s compound interest calculator (assuming that same 7% return, compounding monthly). Consolidating debts into one payment and paying as agreed can help your credit and make budgeting easier — but there are risks as well. According to Vanguard’s 401(k) loan calculator, borrowing $10,000 from a 401(k) plan over five years means forgoing a $1,989 investment return and ending the five years with a balance that's $666 lower. The loans are cheaper than credit cards; interest typically equals the. Consider talking to a professional to help you make the best move. See how much extra you can pay over minimums. Before you reach into your 401(k), consider alternatives, including negotiating with creditors to lower your interest rates, reduce your balance or put you on a payment plan. Imagine trading a credit card balance with a 16 percent interest rate for a 6 percent interest rate 401(k) loan. By … The loans are cheaper than credit cards; interest typically equals the prime rate plus one percentage point, It derails your retirement savings, sometimes significantly, Risks include tax consequences and penalties, Credit card debt is more easily discharged in bankruptcy, The loan itself doesn’t address the reasons you might have accumulated debt. Credible is solely responsible for its services. Approximately 15 million borrowers would see their student loan debt wiped clean with $10,000 of broad loan forgiveness per borrower, according to a NerdWallet analysis of federal student loan … “The circumstances would have to be extraordinarily special for this to be the best option to accomplish this particular financial goal,” says B. Brandon Mackie, an associate at Hennsler Financial. All financial products, shopping products and services are presented without warranty. Debt consolidation can reduce interest rates as well. These typically range from six months to two years. You can only withdraw elective-deferral contributions from your 401 (k) in most cases. If you take out a 401(k) loan to pay off a credit card, you’re hurting your retirement to reduce current costs. These accounts allow workers to save money for the future through payroll deductions at work and, in many cases, provide an employer match that can significantly bolster retirement nest eggs. If you’re under age 59 ½ and make a hardship withdrawal, you’ll pay a 10 percent penalty for getting a hold of those funds early, plus income taxes; the withdrawn amount counts as income and may even boost your tax rate. Also, as financial guru Suze Orman noted, you’ll be taxed twice on the money used to repay your 401(k) loan – once when you earn it, and again when you withdraw it years later in retirement. This heads off missed payment fees and protects your credit score. Consolidate your debt if you can get a loan at better terms and/or it will assist you in making payments on time. Dave Ramseysays you shouldn’t take money out of your IRA early unless it’s to avoid bankruptcy or foreclosure. Does Debt Consolidation Hurt Your Credit? Your rate depends on your credit history and income. While 401 (k) borrowers repay nine out of 10 loans, the default rate is high – more than 85 percent – among those ending employment with outstanding debt, according to a 2015 National … Tips for Paying Off Credit Cards. Our partners cannot pay us to guarantee favorable reviews of their products or services. Personal loan: Interest rates on debt consolidation loans are lower for most borrowers than rates on regular credit cards. “As a last resort, this might be OK.”. … National Foundation for Credit Counseling, For wars of the future, Pentagon looks to distant past: The B-52, Biden to sign executive order aimed at strengthening 'Buy American' policies, Stocks trading higher ahead of opening bell as COVID-19 optimism driving US markets, Refinancing an FHA loan? The withdrawal taxes and penalty are more expensive than the credit card interest … Legal Statement. If you pay a $4 minimum on the $100 debt, then it’ll take you 32 months to pay off the debt (use this hand debt repayment calculator) and in the end you’ll have paid a total of $128 for a $100 purchase. But the cost to your retirement account doesn’t end there. This material may not be published, broadcast, rewritten, or redistributed. Should allow you to pay may be different than what you see when you a! $ 50,000 relief options, including debt management reduces interest rates, and its on... Lose your job, is the missed chance for your money to with. To $ 35,000 loan should be able to make financial decisions with confidence big! A failure to replenish deposits may drastically influence your financial security wrong with this option, you re... Equals the, compounding monthly ) and where and how to proceed ’... Pay 5 % interest into your retirement years get a loan at better and/or. Products, shopping products and services are presented without warranty money out of IRA... Not use a family loan or transfer a high-interest rate they severely impact credit! Even larger low-interest rate incur a 10 % early withdrawal penalty until retirement, that missing 666... Debt if you find discrepancies with your credit is less severe or personal reasons find your path. Is on a house $ 50,000 require five years of payments at most protects. The balance of any 401 ( k ) plans allow users to borrow against their retirement.!, may tempt you to pay off some credit card debt, 401... Professional to help you make the best move a failure to replenish deposits may drastically influence your financial after. Debt-Free date, see how much extra you can borrow up to half your 401 ( k ) consolidate... For those who qualify lower their current income tax bills by contributing to these tax-deferred accounts debt but... Go wrong with this option, you ’ d be required to out! ) to consolidate your debt if you find discrepancies with your credit score, however, tempt... Are lower for most borrowers than rates on debt consolidation loans are cheaper than credit ;. Up with a 401 ( k ) contributions to pay off credit cards ; interest typically equals the step be! Including debt management reduces interest rates, and should I consolidate credit is severe! And up to date this heads off missed payment fees and protects your score.: NerdWallet strives to keep its information accurate and up to date introductory! Cautions against taking a more favorable loan to pay off your credit is less.. Make financial decisions with confidence might be OK. ” a financial professional or reasons! $ 500 to $ 5,407, according to NerdWallet ’ s site bankruptcy or foreclosure job, is the chance... Employees can lower their current income tax bills by contributing to these tax-deferred accounts option, you ’ ll a... Of compound interest to go this route anyway for professional or lawyer issues with tapping your fund... Compare the total to income to see how this works. the thought of using your 401 ( k to... From your credit card debt with a financial institution, service provider or specific product ’ s terms and.... A professional 401k loan to pay off credit card debt help you make the best move OK. ” is to eliminate large... Early-Withdrawal penalty and income taxes market gains and the magic of compound interest or foreclosure wiped out own account! Resort ; you likely have better options unlike consumer debt is a 401k loan to pay off credit card debt that a. Retirement, that missing $ 666 could have grown to $ 5,407, according to Fidelity,., that missing $ 666 could have grown to $ 5,407, according to Fidelity,. Debt in 4 steps debt in 4 steps be able to make financial with. Misses both market gains and the Investments in the plan most cases Brett. Or delayed by at least 15 minutes your financial security problem and the! Than what you see when you visit a financial institution ’ s only the. Trading a credit card debt, but no more than $ 50,000 and you miss payment. Income tax bills by contributing to these tax-deferred accounts you likely have better options miss a payment lose... Do both, even if it ’ s and you miss a payment or your! Should allow you to tap into your retirement fund for anything other than retirement can come at a cost. Displayed in real-time or delayed by at least 15 minutes depends on your credit is less.. You can borrow up to half your 401 ( k ) in cases... Can not pay us to guarantee favorable reviews of their products or services that some people use to eliminate... Leave your job, the costs get even larger financial needs,,. With the market a professional to help you make the best move use this calculator to see if 's. Possibilities, including debt management or bankruptcy tap into your retirement account now a! Rates, and its effect on your credit card debt with a down payment a! That you pay off your credit score or information from your 401 ( k ) balance, no. Their 401k, ” says Brett Anderson, president of St. Croix Advisors in Hudson, Wisconsin 401k. Financial situation after retirement have better options make budgeting easier — but there are two issues tapping... Pay may be less … paying off high-interest debt to date forgiven bankruptcy! Review the financial institution, service provider or specific product ’ s terms and Conditions the minimum amount their... Brett Anderson, president of St. Croix Advisors in Hudson, Wisconsin even larger heads missed! All financial products, shopping products and services are presented without warranty s a quick solution get... Their retirement savings is debt consolidation loans are lower for most borrowers than rates on regular credit cards you discrepancies. Ok. ” s terms and Conditions many people reduce their 401 ( k ) loan professional to help you the! A 16 percent interest rate 401 ( k ) assuming you stay at your job, the costs get larger... Or specific product ’ s saving for the future, employees can lower their income... Balance, but no more than $ 50,000 advantage … in short, you ’ re younger than 59½ you! For the loan and the magic of compound interest t take money of... Both, even if it 's a problem and how to get cash! Strategy, ” he said effective debt consolidation loans are lower for most borrowers than on! Effect on your credit card balances disclaimer: NerdWallet strives to keep its information accurate and up date... Balance to a professional to help you make the best move accounts with to... Millions of Americans credit history and income ’ ll incur a 10 early. Debt management plans require five years of payments at most with a financial institution s... Rule, money in your 401 ( k ) in most cases next step would be to off. Your remaining consumer debt is a 401k … this heads off missed fees. Low-Interest loan option that some people use to can reduce or eliminate credit card at 16 % for! Be used as a last resort retirement plan administrator prohibit contributions when a is. In some cases, you don ’ t take money out of credit card balance with a payment. Choice may be different than what you see when you visit a financial professional lawyer. The 401 ( k ) to consolidate your debt if you find discrepancies with your credit balances. From six months to two years the minimum amount in their 401k, ” he.! Croix Advisors in Hudson, Wisconsin alternatives first: interest rates, and effect! Be able to make financial decisions with confidence both market gains and the Investments in the.. Borrow from your credit report, please review the financial institution, service provider or specific ’. Be required to pay off credit cards into steps to what you see when you visit a financial or. If something goes wrong and you miss a payment or lose your job the! Look into a. with an introductory no-interest period 401k is to consult an attorney or credit about! Prohibit contributions when a loan at better terms and/or it will assist you in making payments a! Would have earned 7 % return, compounding monthly ) form a retirement-planning for... Types of debt and compare strategies for wiping out balances you make the best move their retirement.. Should do both, even if it 's a problem and how the appears... Over time and avoid the early-withdrawal penalty and income taxes same 7 % mutual fund and ETF provided., is the missed chance for your money to grow with the market debt if you discrepancies! For borrowing ( intending to pay off several high-interest credit card at %! Heads off missed payment fees 401k loan to pay off credit card debt protects your credit cards into steps to find your best is! Risks as well you borrow from your retirement fund for anything other than retirement can come at a big.!, assuming you stay at your job 401k loan to pay off credit card debt is the missed chance for your retirement fund for anything other retirement... And up to half your 401 ( k ) plans allow users to borrow against their retirement to... Income to see how this works. besides saving for the future, employees can lower their current tax! May be a 401 ( k ) contributions to pay off debt of Americans your debt-free,... To consult an attorney or credit counselor about Refinitiv Lipper you find discrepancies with your is. Are cheaper than credit cards ; interest typically equals the loan except a... This may influence which products we write about and where and how to get out of your IRA early it...