Borrowing from 401K

[earpiemom]

This may not be the right board to post this on but I thought many of you may have information or opinions regarding the matter. My husband was in an accident and we have racked up considerable credit card debt as a result. I am a state employee and he is a county employee. We both have 401K accounts. I have heard of people borrowing against these accounts. Is that a good idea and if so how does it work. Thank you for any information or thoughts.

 

[budbeerlady]

You wil have to check your plan documents. Ours does NOT allow hardship borrowing or dispersals. It had to specifically go toward the purchase of the home or it wasnt doable.

Good or bad idea, I have no idea about that. You know your situation better than I do.

 

[HayGan]

I'm sorry to hear about your DH's accident. I hope he is doing better now!

Borrowing from your 401k is one of the worst things you can do for two big reasons:

1) You will lose out on future gains from the money invested. Over time that number will be considerable as the effects of compounding can be significiant.

2) You will be double taxed on the money (you are taxed on the loan payments as well as your withdraws in the future.)

I know most people say that it is better to pay interest to themselves rather than the cc companies but in fact when it comes to borrowing from your 401k this really is not the case!

Have you tried looking into transfering balances to a lower rate card or contacting your cc's to see if they will lower your rate? If that is not possible and the cc is overwhelming to you, I would even recommend a reputable credit counseling program before borrowing from your 401k.

Good luck

 

[Kathi OD]

The general school of thought is that it is not a good idea to take from your retirement fund to pay off day-to-day bills.

Having said that, I'd much rather borrow from my 401k at what is generally a much lower interest rate than the CC's are charging than pay that high interest rate. The other thing I like about borrowing is that there is a set amount of time to pay back the 401k, unlike a CC, where you could be paying for 20 years. Of course, the obvious problem is not using the CCs any more after paying them off.

We borrowed from my 403b to pay off some credit card debt a couple of years ago. The interest rate at the time was 5%, compared to 12% on the CC. Additionally, 1/2 the interest I paid on the withdrawl was paid back into my account, with the other 1/2 going to the company who held the 403b funds; so in effect I was borrowing at 2.5%. The downside is that the funds you withdrawl are not available to work for you. Paying them back a little at a time can, depending on the amount you borrow, and the state of the market at the time, really have a negative impact on your account.

With the way the market is now, if you can pay back the loan quickly, you might make out OK.

 

[Siouxstone]

Most people will say it is a bad idea. However, sometimes you do what you have to to get by.

As far as a the IRS is concerned, if you borrow from your 401K and quit or lose your job before the loan is paid back, you are taxed for the entire amount you took out, even if you've paid most of it back. The tax rate is a huge since you didn't wait until it was available under normal circumstances, so you can be slapped with a huge tax bill.

Contact the company that handles your 401K. They can answer all the specific questions.

HTH

 

[Kathi OD]

I'm sorry to hear about your DH's accident. I hope he is doing better now!

Borrowing from your 401k is one of the worst things you can do for two big reasons:

1) You will lose out on future gains from the money invested. Over time that number will be considerable as the effects of compounding can be significiant.

2) You will be double taxed on the money (you are taxed on the loan payments as well as your withdraws in the future.)

I know most people say that it is better to pay interest to themselves rather than the cc companies but in fact when it comes to borrowing from your 401k this really is not the case!

Have you tried looking into transfering balances to a lower rate card or contacting your cc's to see if they will lower your rate? If that is not possible and the cc is overwhelming to you, I would even recommend a reputable credit counseling program before borrowing from your 401k.

Good luck

I just realized that the OP is a state employee and her DH is a county employee. As employees of governmental agencies, they should have 403b accounts, not 401k. Loans taken against 403b accounts are NOT taxed at the time of withdrawl. They are only taxed if they are not paid back on time.

OP, check with your plan's provider. I have two 403b plans. One permits loans, the other does not. I am also thinking that you might be talking about a pension loan. We can do those also, but I'm not sure how they work.

 

[tonilea]

According to Dave Ramsey, you should never borrow from your retirement, UNLESS it is to save your home.

 

[crisi]

I just realized that the OP is a state employee and her DH is a county employee. As employees of governmental agencies, they should have 403b accounts, not 401k. Loans taken against 403b accounts are NOT taxed at the time of withdrawl. They are only taxed if they are not paid back on time.

OP, check with your plan's provider. I have two 403b plans. One permits loans, the other does not. I am also thinking that you might be talking about a pension loan. We can do those also, but I'm not sure how they work.

401ks aren't taxed on withdrawl either, that isn't where HayGan is getting the double tax.

Let's say I take out $10,000 from my 401k as a loan - I won't be taxed on that loan.

Now I pay it back - with after tax income - so - lets say thats a 25% tax rate - I have to earn $12,500 to pay that money back - and I now have that $10k back in my 401k.

Now when I retire and take money out of that 401k, I pay taxes on it - because I supposedly didn't earlier. There is no provision for "except for this money here which we already taxed." So I'm still at that 25% bracket (just to make things easy) and need $10k, I have to take out $12,500.

So the government has gotten $5000 from me in taxes when if I hadn't borrowed they would have only gotten $2500.

Thats a pretty heavy penalty.

 

[HayGan]

Most people will say it is a bad idea. However, sometimes you do what you have to to get by.

As far as a the IRS is concerned, if you borrow from your 401K and quit or lose your job before the loan is paid back, you are taxed for the entire amount you took out, even if you've paid most of it back. The tax rate is a huge since you didn't wait until it was available under normal circumstances, so you can be slapped with a huge tax bill.

Contact the company that handles your 401K. They can answer all the specific questions.

HTH

That is incorrect. You only have to repay the remaining balance on your loan by the end of the tax year in order to avoid the penalty.

 

[Karenj2]

I've actually done that (before I came to the DISboards, where I would have gotten good advice). I wouldn't recommend it.

DH and I borrowed money from my 401k when we had financial issues in 2003, and I hadn't finished paying it off when I got laid off from that company in 2004. Not only did I have no income, but I also had to find a way to pay off the loan before I would have been hammered with taxes. Unfortunately, our only solution was for DH to close his Roth account, pay THOSE taxes, and pay off the loan. (It was a mess.)

There are a bunch of things I'd recommend trying before you dip into your future...
1) Talk with the CC companies, and try to get a lower %. (If you can't do that, transfer the charges to a lower % CC if at all possible.)
2) Talk to the hospitals and see if a payment plan can be set up, instead of paying the bills in one lump sum.
3) Go through your budget and find out where you can cut, to free up money towards your debt. (I HIGHLY recommend www.youneedabudget.com)
4) Sell stuff on eBay, etc. to get more $$.
5) If possible, get a temp job somewhere, or if you're hourly, as if you can work some overtime

 

[problemchild718]

I wouldn't do it for all the reasons mentioned previously. It becomes more difficult to pay it back. If your able, search for a low rate or 0% CC to transfer the debt onto and start piling every cent you can onto that card. I would also cut out wherever you can and build up an emergency fund ASAP so you have a cushion. Hope DH is ok.

 

[JoanneNC]

Definitely wouldn't do it.
It may seem like a good solution NOW - but 20-25 years from now you will pay double the price in what you gave up.

 

[chicagodisneyfan]

According to Dave Ramsey, you should never borrow from your retirement, UNLESS it is to save your home.

I find Dave Ramsey stupid and so do not find that much or a recommendation.

With this stagnant market I think borrowing from your 401K may work for you. We did it 10 years ago when I got a huge hit on capital gains tax the same month as I was due to close on a new house. So I tapped a quick 15,000 to cover the taxes.

My husband has been with the same employer for 17 years and is in a strong union and pretty much cannot be fired so I felt secure that it would be paid back and not have tax implications.

 

[JoanneNC]

I find Dave Ramsey stupid and so do not find that much or a recommendation.

.

As a non DR fan - this made me chuckle..lol

 

[Chicago526]

Not only that but 401k/403b accounts can't be touched in bankruptcy. If you borrow from the 401k and then something else happens and you have to declare bankrupty, you'll have lost that retirement savings on top of everything else. If you leave it and have to declare, you keep it.

You're better off paying the CC's down over time, even with the interest payments. It may cost you a few hundred or thousand in interest short term, but long term it could save you a bundle.

 

[Shmily1]

I've done it before when I had to and would do it again if I had to. It is cheaper than CC debt and you are paying yourself back, not some bank in never never land. I think you are certainly looking in the right place if this is what you need to do.

 

[RitaE]

what the others have said.

Retirement funds are crucial. Borrowing against them is kind of like -- borrowing against your future oxygen. You NEED that money to buy food and housing in the days when neither of you can work. So, you don't touch that money just to solve a current crises. You only touch that money if you absolutely positively have no other choice.

With credit cards you DO have a choice. It isn't a pretty choice, but it is still a choice. You just don't pay them until later.

 

[EthansMom]

If possible, I would try avoiding borrowing from a 401k.

Have you stopped adding to the credit card debt? I'm assuming your DH has recovered and is back to work. In that case, you should make sure that you aren't still using the credit cards. You need to work on staying within your means (spend less than your income).

I'd recommend calling the credit card ***. to see if they will reduce your interest rate. If that fails, consider going to your bank or credit union and look into a personal loan to get the interest rate reduced.

The more money you can find in your budget to pay down your debt, the better. I highly recommend the Debt Snowball Method of debt reduction (http://en.wikipedia.org/wiki/Debt-snowball_method). DH and I paid off tens of thousands of dollars using Debt Snowball.... a variation of which is recommended by most every professional debt advisor out there.

Good Luck!

 

[GoldieSaysMeep]

I actually withdrew the entire thing last year and consider it one of the best things I have ever done to secure my finances in the future. I'm going to be working for at least 35 more years and after I withdrew, I was able to wipe out some major high interest debt from an unfortunate vetrinary surgery. (my very young dog didn't survive the two major emergency surgeries either which made it extremely difficult to look at the bill every month due to remembering what it was from).

I've since started adding to the 401K again and it's doing fine. No, I won't have as much when I'm 65, but my credit won't be horrendous either. Also, I have more money after each check to put in regular savings.

Then again it's just me and it will always just be me. If I was married or had kids, I might care more. I guess it's a different perspective when you will only just be looking out for yourself.

 

[tonilea]

I find Dave Ramsey stupid and so do not find that much or a recommendation.

With this stagnant market I think borrowing from your 401K may work for you. We did it 10 years ago when I got a huge hit on capital gains tax the same month as I was due to close on a new house. So I tapped a quick 15,000 to cover the taxes.

My husband has been with the same employer for 17 years and is in a strong union and pretty much cannot be fired so I felt secure that it would be paid back and not have tax implications.

I understand that many don't care for Dave Ramsey's advice. It doesn't change my opinion one little bit. It wasn't until we started on the DR program that our lives changed dramatically. I am now debt free. (How is your financial plan working out for you?) Financially we have never been in better shape.