Using Your 401k Plan To Get Out Of Credit Card Debt
Presenting yet another strategy to get you out of outstanding credit card debt.
Trying to trade bad amount of debt for good amount of debt. You must understand that this is probably not the very best way to toss away your debt, but people have tried it before to consolidate or pay their credit card debt. This method comes with one interesting point though — that if you do this sort of thing, then you must at all cost try to repay your loan or you will face the imposed 10% penalty for the early withdrawal. Lets examine this approach to see how it works in detail with helping you stop the credit card debt.
If the 401k plan you have allows you to get loans (and most of them do), then you can try and borrow up to 50% of your normally vested account. This translates to the balance or $50,000 or whatever is less. Now with this approach you should note that usually there is a maximum of five years that allows you to fully repay the loan you are getting. This is however different if you are borrowing loan for a first home in which case there is a longer payback that is allowed on the loan.
The pros of this method used to prevent credit card debt.
1. First of All there is no credit check at all.
2. Your interest rate is extremely low or laughable.
3. When you are in a situation to to pay yourself, this provides for very good return.
4. The whole interest is fully tax sheltered because you only pay taxes on the interest upon retirement.
5. It’s very easy approach and also very convenient way to stop credit card debt.
The cons of this approach
1. You are basically losing the interest which would otherwise end up in your retirement account.
2. You will also need to repay 401k debt with after the tax dollars.
3. All your future withdrawals will basically remain taxable at future tax rate.
4. You will also incur 10% credit card debt penalty plus taxes if you are basically younger than 59
5. Since the whole credit card debt loan is also a consumer loan it is not tax deductible.
6. This kind of practice can be dangerous if done lot of times and ends jeopardizing your retirement.
Again this is probably not the best method to get rid of your credit card debt. But it does offer some flexibility in how the things are done. If you are serious about doing it, get also an advice from professional as they can help you in these kind of situations. Do not just go and do it, make sure you understand all the consequences. This method has helped many people stop their credit card debt in the past.