Comments on: 4 Reasons You Should Not Use Your 401k to Pay Off Your Credit Card

By: Why You Should Keep Contributing to Your 401k

Why You Should Keep Contributing to Your 401k — Tue, 13 Oct 2009 04:19:49 +0000

[...] a good idea to keep contributing even if you are falling behind financially. Should you pay down debts with your 401(k) assets? Only as a last resort. In fact, if you are looking at a bankruptcy or similar financial [...]

By: Joe Plemon

Joe Plemon — Thu, 24 Sep 2009 13:47:23 +0000

Marc,

You have put much thought into your comment and have given some compelling reasons for dipping into your 401(k). My response is somewhat the same as I gave to janet…personal finance is more about behavior than math.

Of course you have already made that decision, so I am hoping that you will become radical about paying back your 401(k) and while doing so, avoid new credit card debt like a plague.

Once you have the $23K paid down, I think you should set aside $1000 or $2000 for emergencies and then quickly pay off the $7000. After that, take the money you were using to pay off the 401(k) loan and either pay off any other debt (except your house) or quickly build up your emergency fund with savings. Do all you can outside your 401(k) to avoid the allure of tapping it (or credit cards) in the future.

Thank you for reading and for writing. I truly appreciate your thoughts and wish you the best as you work toward becoming debt free altogether.

By: Joe Plemon

Joe Plemon — Thu, 24 Sep 2009 13:28:38 +0000

janet,

Aren’t CC companies great? They can be ever so sweet until they get their hooks into you and then their true nature (bloodsucking leaches) comes out.

You say that you feel that a 401(k) loan is your only option. Maybe so, but here is where I am coming from: personal finance is much more behavior than math. I would become radical about getting my CCs paid off as soon as possible and then get them out of my life forever. Radical means second job (temporarily), forgoing vacation, no eating out, selling an expensive car, etc. These sacrifices will change your behavior forever so you will never ever find yourself in the clutches of creditors.

I just don’t like the mindset of tapping retirement funds because of debt. Doing so could become a habit and such a habit could jeopardize your retirement without dealing with the real issues of why you are in a position to need that money.

I thank you for reading and I hope that, your way or my way, you can become debt free and move toward a great retirement.

By: Marc

Marc — Wed, 23 Sep 2009 21:01:07 +0000

I read over and over that borrowing from a 401K is a bad idea. I understand the pitfalls, however, I think there are situations where it can make sense. First of all, many say I’ll miss out on “Opportunity” of the borrowed money. Well, what about the negative “opportunity”, such as in 2008 when I saw my 401K go from about $300K to $175K, man, did I wish I borrowed that money then to keep it out of the market. So, in the lovely bull market of 2009 much of my money is back in the 401K, so I’ve borrowed $30K, at 3.25% for five years to pay off $23K in debt (fixed at 5%) and also have some left over ($7K). All the articles I’ve ever read indicate the problem with losing a job and still having the 401K loan outstanding, but most articles don’t mention what will happen to me if I lose my job and I still owe $23K to credit cards. I would honestly rather default on my 401K loan, and pay say a $10K penalty, which would probably come out of the remainder of my 401K (still plenty left), than default on my credit cards and never have good credit again, watch my interest rise from 5% to 25%, and be beholden to the banks forever. Then it would be too late to reach for my 401K (if no job). So I’d rather do it now when I can. Also, taking out an additional $7K and putting it in a savings account (yes, very low interest at best) at least gives me some cash to reach for if I were to lose my job so I can have a little cushion, a very little one, to make some subsequent grim decisions moving forward or hold me over. Right now I have $300K in 401K, but not much other savings so if I lost my job I’d be screwed by the end of the month. Yes, I have to be extremently careful and change my habits and not spend that additional $7K, but that is no different than with spending on a credit card. (Incidently, the cc debt was $26K a year ago, so I have made progress and going in the right direction). Another benefit of going with the 401K loan is I’m immune from the credit card companies raising rates unexpectedly, and doing some other scary things that I’ve been reading about. And yet another benefit that goes unmentioned often, is theoretically my credit score should skyrocket (already 790 though), thus some day enabling me to get a better refinance on my large california mortgage. And the last thing that I just don’t understand is the “you’ll be taxed twice” argument. Yes, it is a true statement, unarguable. But paying off my credit card with my salary is also “after tax” money, and a dollar is a dollar, so how is that different than paying off my self loan with after tax money? Anyway, maybe I’m missing something, but I don’t think all situations are equal and it very well could make perfect sense. Hope so, because it is exactly what I am doing. Thanks for reading!

By: janet

janet — Wed, 23 Sep 2009 13:00:35 +0000

…but but…..because of a few distracting factors it completely got by us that we are now being charged 19.99% interest on our highest balance credit cards. Our credit score is excellent and the CC company said “sorry, do what you have to do” when I told them that I will close the account this week. We have been approved for a platinum MC at a lower fixed rate through our FCU but we have to combine a previous card, and that would create a “maxed out” situation. We feel as though a 401k loan is our only option. We are confident that we have put ourselves in good position to remain at low debt-to-income ratio after this move.

By: Suze Orman’s Debt Loyalty List: An Order of Paying off Debt

Suze Orman’s Debt Loyalty List: An Order of Paying off Debt — Thu, 27 Aug 2009 04:13:51 +0000

[...] party. On that note, I agree with Suze. Often times I’ve had clients that have wanted to cash out their 401k’s to pay off their credit cards. Whatever you do, DO NOT do this! Your 401k is protected from bankruptcy and might be the [...]

By: J. Money

J. Money — Wed, 22 Jul 2009 20:42:13 +0000

WOW. I’m glad that person wrote in!! I 100% agree to stay away from your 401k. It’s actually #9 on my recent “best order to take out money” (excuse me for linking over) right below payday loans! haha….

Let that 401k sit there and continue growing.

By: Wojciech @ Fiscal Fizzle

Wojciech @ Fiscal Fizzle — Wed, 15 Jul 2009 19:38:29 +0000

Joe,

I agree – cash up front is my preferred choice as well. It always seems like you plan and plan and figure out a way you’re going to pay down everything right on time, and then a month after you get going, something changes – your income, expense situation, whatever, and the loan lags and lags until you get hit with penalties and interest.

So yes, I echo your sentiment and hail “cash is king.”
Wojciech @ Fiscal Fizzle´s last blog ..Saving More vs. Insuring More

By: Joe Plemon

Joe Plemon — Wed, 15 Jul 2009 19:17:49 +0000

Wojciech,
As the risk of sounding snarly, the scenario you described would never occur if you always save up and pay cash instead of buying anything on credit. As you aptly described, the “24 months same as cash” loans are time bombs ready to ignite.

Would I advise someone in that situation to tap their Roth IRA in order to avoid those two years of interest, penalties, etc? Hmmm. Maybe, if I thought they had sufficiently learned the lesson to never borrow money again.

By: Joe Plemon

Joe Plemon — Wed, 15 Jul 2009 19:00:25 +0000

Deb
Yes, you can save some interest by borrowing from yourself, but Motley lists several drawbacks. In general, I don’t like the risk of knowing that the entire loan comes due if I leave employment (or in five years). Worst case scenario: a married person takes out the loan, then dies unexpectedly. The surviving spouse has not only lost that income stream, but now has to figure out how to pay all of the money back or else pay taxes and penalties.
I like to keep my finances simple and avoid risk whenever possible.