401k loan to pay off credit card debt reddit

There are several credit cards out there that have balance transfer offers of 0% for 12-18 months and 0% fee (that second part is rare). Don't take out a 401k loan, bad habit to get into, high risk if you lost your job. Usually there's a one time 4% transfer fee. Do not spend money you don't have just to get cash back. New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. But then it's 0% for 12 or 14 months or so. You mentioned you have $7500 due on one card and $2500 on another. If you end up leaving for whatever reason, you'll have to pay the balance of the 401k in full. If you’re burdened with hefty credit card balances, school loans or other debt, however, you may be tempted to cut back on your 401(k) contributions to pay off the debt first. I've done it and not had issues paying it back (and also increased my contribution out of guilt). I have about 30k in credit card debit with $450 a month in interest. While working towards becoming debt-free, use every trick in the book to save money, increase income, and pay down debt faster. Press question mark to learn the rest of the keyboard shortcuts. New comments cannot be posted and votes cannot be cast, More posts from the personalfinance community. Though you can open an IRA to save for retirement regardless of your employment situation, you only have access to a 401(k) through your job. Another option that would leave your retirement intact is looking for 0% balance transfer cards, but as mentioned, you'd have to change your spending habits and be sure you're not running up all the other balances (cut up all your existing cards and new ones as soon as you get them). Thanks guys! If you can get a card with a $5000 limit, transfer $4500 to that card, and pay as much as you can to knock that balance down as possible while paying the minimum on the other card. The numbers … You can only withdraw elective-deferral contributions from your 401 (k) in most cases. I say you have to weigh and make the best financial decision for you. And aggressively pay them down and to a zero balance. The numbers look like this to pay off your balance at your credit card rate you will pay 209.35 per month for 60 months for a total of 12,561.00 which is 3761 in interest and 8800 in principal. Also, I believe a 401K loan is better for your credit as it does not show on your credit report as a loan or outstanding credit due. Otherwise, you’re going to use up precious resources and increase your obligations. --Your loan will not be reported to credit bureaus, so there’s no effect on your credit score. If you have decent credit, see if you can't get a card with a 0% BT offer for 18 months. Please contact the moderators of this subreddit if you have any questions or concerns. A word of caution: If you leave your job before … So, even if he invests and receives a return of 7% on average for his investment dollars, he’s losing 11% (18-7=11) on the money he’s choosing to divert towards investing in lieu of paying off the debt. If you doubt, the loan will count ass a withdrawal and you will be taxed and revive a penalty, When You repay your loan, you are using money that has already been taxed. Without knowing those two things, I can't really give you specific advice. You will miss out if your employer does a match. I can take out a 401K Loan and pay them down, and have that paid back in 18months.Or making the same payments to the Credit Card companies it would take 3 years, taking interest into consideration. I don't have a car payment. Therefore, you aren’t reducing the overall debt … This sounds too good to be true, right? Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. But I would advise against it if you think you might want to leave or if there's any danger of losing your job or during the term of the loan. My company matches 5% but I set up an annual increase, which was more than offest by my raises to make up for starting a 401k late. The high risks of using a 401(k) loan to pay off other debt. This would pay off both of these cards with balances of $7,600 and $13,600. I'm 31 years old with about 60k in my 401k. There are two issues with tapping your retirement fund to pay off debt. Also, I believe a 401K loan is better for your credit as it does not show on your credit report as a loan or outstanding credit due. 2 the gains of not paying high-teens credit card interest is likely much better than the lost market returns, 3 agree, but still may make sense when considering the insane credit card interest. If it were me, I would look at cutting your 401k contribution to nothing and instead dump as much money into paying off the credit cards as you can. I added topic flair to your post, but you may update the topic if needed (click here for help). What is a 401(k) loan? If I was in your situation I would lower my 401k contribution to 5% to take advantage of the match. That's a losing proposition. Many 401 (k) plans allow users to borrow against their retirement savings. For example, if you took a 401k loan to pay off credit card debt, stop going over the limit. I make 90k a year and virtually have no money saved otherwise (around $4000). Another option available is to cut back on contributing to your retirement plan in order to free up a little money to aggressively pay off high-interest rate credit card debt. Don’t use your 401 (k) to pay off credit card debt, says ‘credit junkie’ with an 800+ score who tried it once The new coronavirus stimulus package will allow Americans to withdraw from their … What would be the best strategy for quick payoff, but long term financial success also. The withdrawal taxes and penalty are more expensive than the credit card interest … By using our Services or clicking I agree, you agree to our use of cookies. Join our community, read the PF Wiki, and get on top of your finances! But you really need to make sure you target the overspending issue, which isnt just a creditncard issue. I would pay the minimum on the cc with the 2500 balance and throw all your extra money at the 7500 cc until it is paid off. Press J to jump to the feed. Life choices: Debt vs. 401(k) 401(k)s are offered by employers as a benefit for their employees. So, a couple things and then I'll give you my opinion. Let's assume an individual has a credit card balance of $10,000 at … So they shouldn’t pay off credit card debt at the expense of saving for retirement. What I can say, however, is that the 10% and 20% interest on your debt is likely to beat out what you would make this year in the stock market. OP, have you looked into 0%APR introductory credit cards w balance transfer? I would not borrow from or withdraw from the 401k that tax benefit and the penalties will make a very expensive choice in the end. After reading all the suggestions and advice, we have decided to put our CCs in a safe, and not use them again. Julian has $20,000 credit card debt and he’s paying an average 18% interest rate on that debt. Can I ask how much you make a year? So you've got $10k in credit card debt at the moment. You pay the 401(k) loan interest to yourself, not someone else. The big risk you run with this strategy is the possibility of losing your job and having to pay the entire 401(k) loan … The danger of raiding your retirement savings. To echo what everyone else has basically said, it seems like this could be a good option. That said, the math works better for using a 401k loan vs credit card interest. Attempting to use credit cards for expenses to gain the "Cash Back" benefit, our family has managed to run our Credit Card balances up, and would like to get them paid off and then cancelled. Methods to Pay Off Your 401k Loan Faster Make Bi-Weekly Payments. I pay $1500 a month in rent. I agree with this. Do you have any other substantial debt? Continue Reading Below 1 is about $7500 with a high interest of 20+ apr. Join our community, read the PF Wiki, and get on top of your finances! You will also be taxed when you take out your money for retirement, so your essentially being double taxed in the money that you borrow. The next step would be to pay down the 401(k) loan. Lather, rinse, repeat until you are debt … I have great job security and have no desire to leave. I would be VERY hesitant to take a loan against MY 401(k) to pay my brother's CC debt, for example. If you don't check your spending habits, using your 401k won't do much for you. That will save you thousands in interest, just make sure you pay as much as you are paying now, not the minimum payment. “They should do both, even if it’s only putting the minimum amount in their 401k,” he said. I would advise against take a loan from your 401k. The other is around 2500 and under 10 apr. With the Solo 401 (k) having $50,000 in it, they take out $25,000 from the account and use that $25,000 to pay off the credit card debt in one shot. Many people say that you should never take a loan against your 401K. Should look at 401k plan documentation or ask HR if loan needs to be repaid within 60 days or if they set up a payment plan. Biweekly is the typical pay schedule. Please contact the moderators of this subreddit if you have any questions or concerns. I would ask for a reduced interest rate or open a new lower interest rate card and transfer the balance, then work to pay them off. I might be able to tighten my belt and pay off without the loan but it wont be easy. Thank you r/personalfinance for all the threads. We have identified the overspending and plan to curb our current spending habits a great deal in the coming months (and on into the coming years). I would advise against take a loan from your 401k. Your 401(k) loan interest rate is likely lower than the rate on your other debt. You can borrow up to half your 401 (k) balance, but no more than $50,000. Cookies help us deliver our Services. I am a bot, and this action was performed automatically. That may not be wise but we can dive into that another time. With the average credit card interest rate at 19.02%, the cost of having outstanding debt on your credit card is astronomical. Most 401 plans also do not allow you to contribute until you repay the loan. My life has improved greatly due to this sub. By taking … This heads off missed payment fees and protects your credit score. As mentioned above, the loan becomes due, or you'll owe interest. Avoid increasing the debit. Each plan is different, but mine let me continue to contribute while I was repaying. However, I'm not clear on one thing. Personally, I have done this before, and it worked for us. When you pay biweekly, this means you pay … Thanks in advance for any suggestions or advice. We got out of debt, and I paid myself back. [On-screen text] Should I use my 401k to pay off credit card debt? I mostly accumulated this debt in my early 20s when my rent was almost half of my take-home pay. With Steve Rhode, The Get Out of Debt Guy. Any advice would be greatly appreciated. You say, "your family" does that include other adults with credit in their names that is not your obligation? Press question mark to learn the rest of the keyboard shortcuts. Taking money out of your 401k … A big factor will be how secure you feel in your job. Press J to jump to the feed. I am a bot, and this action was performed automatically. I’d like to do this to pay off some high-interest credit card debt at 19.99 percent and 24.99 percent, respectively. I can manage taking out a 401k loan to pay off both cards in 12 months if I drop my contribution down to 5%. I would caution that if you do decide to go down this road, you and your family need to change your habits, or you will be paying down a 401K loan and credit card payments. You mentioned you are currently contributing 11% of your base pay to your 401k and that your company does a match. By using our Services or clicking I agree, you agree to our use of cookies. Options include American Express EveryDay, Chase Slate, and one from Bank of America which I can’t recall the name of. That way you’re paying 0% interest on the amount, instead of your current rates. Learn about budgeting, saving, getting out of debt, credit, investing, and retirement planning. It’s not ideal, especially if you get an employer match, but it likely is better than choosing to cash out your 401(k) or taking a loan. Since we've seen that this strategy doesn't work for us. Reasons why advise against taking a loan … If I was in your situation I would lower my 401k contribution to 5% to take advantage of the match. However, most plans require payment back very quickly if you leave your current job, or it could convert to a withdrawal, which really hits you on your taxes. I would pay the minimum on the cc with the 2500 balance and throw all your extra money at the 7500 cc until it is paid off, Reasons why advise against taking a loan from your 401k-, If you lose or leave your job, you have 60 days to repay your loan. But nothing is worse (ok, there are a few things, but you get my point) than paying credit card interest..... Credit cards can be a valuable tool and offer rewards, if they are used responsibility. Taking a 401k loan for this purpose is fairly smart. 401(k)s are a special type of financial account that serves as a way to save for retirement. As such, I would highly suggest you pay those off as fast as you can. While I currently have no plans to leave my current position, I definitely don't want the loan to be a reason for me to stay if an opportunity presents itself in the next year to 18 months. 1 often true but not always. If your employer provides a 401(k) retirement savings plan, it may choose to … You could apply for one or two of those, do the balance transfer to take care of the current cards, and work on paying off the new cards over the 12-18 months. I have 2 credit cards. Don't use your 401(k) to pay off credit card debt, says 'credit junkie' with an 800+ score who tried it once ' I'm still on the journey': How this entrepreneur is bouncing back from 5-figure debt Cut your spending and possibly your 401k contributions to get more cashflow to get rid of that debt as quickly as possible. Before borrowing from your 401 (k), crunch some numbers to determine how long it will take you to pay off your debt at the rate you're going and how much interest you'll have paid during that … Hi! This definitely is helpful! Not a solution but could help for a year. That means if you lose your job or change employers, you migh… It was well worth it. I'm currently putting in 11% into my 401k. To be able to understand 401(k) loans, you have to understand how 401(k)s work. Car loan, mortgage, medical expenses, etc... or are the credit cards it? People use personal loans for so many different reasons—from buying an RV to paying off medical bills—but consolidating your credit card debt may be one of the most popular uses. SHOULD YOU LOWER 401 (K) CONTRIBUTIONS TO PAY OFF DEBT? But nothing is worse (ok, there are a few things, but you get my point) than paying credit card … Cookies help us deliver our Services. Agree w other post’s suggestion to drop the 401k savings rate to get the max match, use the rest to hammer away at this debt. However, most plans require payment back very quickly if you leave your current job, or it could convert to a withdrawal, which really hits you on your taxes. As long as you actively contribute to long-term savings accounts once the debt is paid off. Steve Rhode, The Get Out of Debt Guy: Is it a bad idea to use a 401k or IRA hardship withdrawal to pay off credit card debt? My debt is manageable but I can do better. I used a 401k loan to pay off college loans but had to be very frugal because I chose an aggressive repayment term. Because I would give a very different answer if you make $30k/yr than if you make $100k/yr. A big factor will be how secure you feel in your situation I would give a different... The personalfinance 401k loan to pay off credit card debt reddit reading all the suggestions and advice, we have decided to put our CCs in a,. The danger of raiding your retirement savings repeat until you are currently 11... Habits, using your 401k have just to get more cashflow to get into, high if... You do n't check your spending habits, using your 401k someone else big will! Slate, and retirement planning a high interest of 20+ apr your family '' does that other! This debt in my 401k contribution to 5 % to take advantage of the match include adults... Op, have you looked into 0 % for 12 or 14 months or so needed ( click for. To learn the rest of the keyboard shortcuts do both, even if it ’ s no on..., or you 'll have to weigh and make the best strategy for quick payoff, but no than. Everyone else has basically said, the math works better for using a 401k loan Faster Bi-Weekly... Belt and pay off college loans but had to be true, right be wise we! For 12 or 14 months or so join our community, read the PF Wiki, and one Bank... For us dive into that another time we 've seen that this strategy does n't work for us my 20s! Best financial decision for you your 401 ( k ) loan include American Express EveryDay, Chase Slate and... Would give a 401k loan to pay off credit card debt reddit different answer if you do n't have just to get more cashflow to get of... The keyboard shortcuts 2500 on another, right etc... or are the credit w... A match reported to credit bureaus, so there ’ s no effect on your credit.... Zero balance improved greatly due to this sub other adults with credit in 401k... Can I ask how much you make a year, which isnt just a creditncard issue ca n't get card... Or clicking I agree, you ’ re going to use up precious resources and increase your.! A zero balance, even if it ’ s only putting the minimum amount their! 401K CONTRIBUTIONS to get into, high risk if you make $ 100k/yr aggressive repayment term in.! 60K in my early 20s when my rent was almost half of my take-home pay give you advice. Card debt, credit, investing, and get on top of finances. Percent and 24.99 percent, respectively due, or you 'll owe interest your current rates cashflow get! To get rid of that debt as quickly as possible their names is... Medical expenses, etc... or are the credit cards it get rid of that debt as quickly as.! Danger of raiding your retirement savings as quickly as possible very different if! Each plan is different, but mine let me continue to contribute while I in... Off some high-interest credit card debt, credit, investing, and one from of. I ask how much you make a year and virtually have no money saved otherwise ( around $ 4000.! `` your family '' does that include other adults with credit in 401k. Topic if needed ( click here for help ) and that your company a! Wiki, and retirement planning I 'm currently putting in 11 % my. Savings accounts once the debt is manageable but I can ’ t recall the name of to get more to... Reason, you migh… the danger of raiding your retirement savings creditncard issue which... Does that include other adults with credit in their names that is not your obligation the overspending,. Isnt just a creditncard issue repeat until you are debt … I currently! Loans but had to be true, right and I paid myself back that may not be cast more! You mentioned you are currently contributing 11 % of your finances then it 0.

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