Loanio

Question -

Because of the credit crunch, is this a good time to consider borrowing against a 401(k) savings as a means of paying off other loans? My current 401(k) planning investment return is 5 percent, and the interest I will be paying on it is 9 percent.

To borrow or not borrow against a 401K.

Answer -

If you only really consider the numbers in the situation, taking out a loan against your 401(k) in order to pay off a high interest credit card or some other higher interest debt may seem like a no brainer decision. This is because you would be paying yourself back the interest by paying back a 401(k) loan, but with credit card debt or a high interest loan you would be paying as much as 15 percent or more straight to the bank. Plus in today’s market, the 9 percent that you speak of is more than you would make if you were just keeping the money to sit in your account.

With that said, however, most 401k planning experts would shudder at the mere idea of raiding tomorrow’s intended nest egg to fund the financial indiscretions of today. This kind of thing may work out in terms of pure numbers, experts will gladly agree, but that does not make this a good idea, or even one worth putting consideration into. Financial planners generally agree that there are a number of concerns to touch on before you ever make a decision as large as this one, for example:

What if you leave your company?

If you leave your company for any reason at all, you generally only have 30 days to pay back the entire loan in full; otherwise you will have to pay ordinary income taxes on the withdrawal along with a 10-percent IRS penalty, assuming you are under the age of 59 and a half.

The bottom line here is that this is a pretty foolish move in most if not all situations, even if you are desperate to pay off a high interest credit card or some other high interest debt that has been accrued. If you are likely to rack up more debt in the process, have concerns relating to job security, or are paying off loans that are tax deductible or low interest, then this is definitely a foolish way to go. On the other hand, there are scenarios where this could allow you to come out financially ahead, but they tend to be few and far between. If you’re not sure, then it would be wise to sit down with an investment advisor or financial advisor who can help you weigh your options.

Before you take out any loan you should sit down with an expert that can help you review your choices. You just may discover that there is a better, less risky and less costly option that you have not yet explored for this particular situation.

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Originally posted 2008-11-10 20:58:13. Republished by Blog Post Promoter

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