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Borrowing from a 401(k) account to pay off debt

Households around the country owe an average of $15,654 to credit card companies. Paying down this debt while saving for retirement can be a challenge for Mississippi individuals and families who are struggling to make ends meet, and borrowing from 401(k) retirement accounts to reduce revolving balances may seem like a good idea. Credit card interest rates are generally far higher than those imposed by retirement plans, but there are a number of important factors to consider before taking out a 401(k) loan.

Borrowing from money earmarked for retirement may not be a wise decision if it does not address the fundamental problem. When credit card balances are high due to excessive spending, paying the debt off with 401(k) funds will merely provide a temporary respite if spending habits do not change. However, this kind of borrowing may be prudent when revolving debt balances were caused by events, such as medical emergencies, that are unlikely to be repeated.

A 401(k) loan may not be a good idea for individuals who may change jobs in the near future. Employers usually expect workers who leave to repay these loans within 90 days, and failing to do this could lead to a tax bill and penalty fees. Those mulling this option should also consider the impact that borrowing from a 401(k) account will have on their retirement plans. This is especially important for individuals with 401(k) plans that do not allow new contributions to be made until outstanding loans are repaid in full.

Attorneys with debt relief experience may suggest filing for Chapter 13 bankruptcy to those with unmanageable financial situations who wish to safeguard their retirement savings. Funds in 401(k) plans have protection under bankruptcy law, and individuals who take this option may be able to enjoy the benefits of a fresh financial start without jeopardizing their future.

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