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SHOULD I USE MY 401K TO GET RID OF DEBT?

August 10, 2016 | 401K

It seems simple enough-pull money out of your 401k, put it toward the debt you’ve accrued, and later down the line make up for what you took out of your 401k. Unfortunately, this solution to debt isn’t always quite so faultless. While there are some advantages to using your retirement funds for debt, there are also a number of drawbacks to be aware of. Keep reading so you can make an informed decision for your financial circumstances.

HOW CAN USING MY 401K HELP ME?

Perhaps the most noteworthy benefit is that your 401k is already your money. You don’t have to go through an outside lender to borrow funds and it’s much simpler in the long-run. All it typically requires is a phone call to your firm or submitting a brief application.

Furthermore, you may experience better interest rates by dipping into your retirement funds. It does depend on the terms of your plan, but a 401k loan usually has low interest rates compared to other types of loans.

A perk for those who choose to use their 401k is that credit scores usually remain unaffected. Since a 401k loan isn’t really a loan in the technical sense, your credit won’t take a hit as it might in other circumstances.

HOW CAN USING MY 401K HURT ME?

Using your 401k to eliminate debt is a double-edged sword. You’re helping yourself in the short-term, but is it really worth it in the long-run? A 401k gives you financial security even when you don’t know what the future holds and using it to pay for today’s problems is a serious risk.

If you don’t have job security or are considering finding new employment, you may be required to pay back your 401k loan completely within just 60 days. This can be challenging for most people already facing debt and has consequences if left unfulfilled.

It’s also important to measure the risk versus the reward. Your 401k funds are probably invested in certain stocks and bonds, which you’ll no longer receive returns from by borrowing money. If the market is doing well, it may be wise to find alternate means of paying off your debt.

At the end of the day, your circumstances aren’t the same as the person next to you. The best way to pay off your debt is by finding a solution that works for you.Schedule your free consultation with our Columbus bankruptcy lawyer to pursue strategies for a debt-free future and perhaps even avoid sacrificing your 401k.



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