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.
Photo Credits: 1
Originally posted 2008-11-10 20:58:13. Republished by Blog Post Promoter
Related Articles -
Do You Avoid Personal Budget Planning? /caption] One of the things that can make your life easier, even though it sounds complicated, is personal budget planning. If you're one of the fortunate few who never has to worry about running out of money no matter how many extra expenses might crop up or how much extra...... -
How Do I Plan For Retirement? One of the most common questions people have is how do I plan for retirement? Whether you’re looking at retiring in five years or thirty five, it is important to come up with a plan that will provide you with more than enough to live comfortably. It is no longer...... -
Mortgage Interest Rates Start To Change /caption] There was big news within the mortgage industry recently as interest rates finally went back below 6%. The reaction was mixed, but the rate did prompt many people to rush to refinance their homes. For those that are stuck with variable rate mortgages, the current situation in the housing...... -
Are Your Gadgets Sucking Your Wallet Dry? /caption] We live in a digital age and the vast majority of us rely heavily on numerous technological devices to get us through our days. What we may not realize however is just how much these gadgets cost to run. Companies throughout the United States are finding out that they...... -
How Do Savings Bonds Work? Is My Money Safe if I Purchase Them? /caption] These are questions most people ask when they consider buying savings bonds. Yes, your investment in savings bonds is one of the most safe investments you can make. You're purchasing the bond and giving the government cash, which they pay you interest back on at a later date. It's......
Related Sites -
Retirement Planning 101 It is a really good idea for you to have plans when it comes to your retirement. Planning is really only one of the steps that are involved in achieving the life you intend for yourself after work. A plan is going to serve you well when it comes to...... -
Good Debt, Bad Debt and Flawed Investment Return Data I can't tell you how often I hear or read someone argue that they have "good debt." This "good debt" argument is made to rationalize having a car loan, a HELOC or second mortgage balance, and even credit card debt. The argument goes something like this: "The money I have borrowed...... - Funding Matched 401(k) When it comes to finance there are few issues that are black and white, right or wrong. This makes it tough for anyone answering a question but unable to draw out the further details needed to give the topic an in depth review. Often it comes down to numbers vs......
- Common Mistakes in Using Retirement Planning Tools Online retirement planning tools are all over the Internet. Many baby boomers use these tools to help them get back on track or to assess where they are in being prepared for retirement. I have discussed a number of those online tools here at Go To Retirement. Some are free......
- How to Trim Your High Interest Credit Card Debt Credit card debt is awful, but high interest credit card debt can really strangle a family’s budget. Having a lot of monthly payments can seriously cripple your cash flow. And, if your interest rate is too high you may feel that it’s next-to-impossible to pay your debt off. How will......
Tags: 401 k, bottom line, brainer, credit card debt, credit crunch, financial planners, foolish move, good time, high interest, income taxes, indiscretions, interest credit card, interest debt, interest loan, investment return, irs penalty, job security, nest egg, s market, straight to the bank