401k Withdrawal Rules – From Ask Bill

Question: I have about $20,000 in credit card debt. Some of this is at a very high interest rate. I have the option of taking a loan on my 401k savings to get rid of all the debt but want to know the consequences of doing this.

Answer:
That is a very good question. Frequently, borrowing against your 401k is a powerful way to lower the effective interest rate that you are paying on unsecured debt.

If the interest rate on your credit card debt is higher than the interest rate on your 401k loan (which is almost always the situation), then a 401k loan will likely be a good solution for you. The benefits are less money going to cover interest fees and possibly a lower monthly payment. Ideally, you would use the extra cash flow to pay down the total debt amount faster, getting

debt free in a shorter amount of time. Be sure not to "run up" your credit cards once they are paid off!

You will want to be careful not to cash out your 401k savings, however, and simply borrow against your savings. If you liquidate, or sell assets from, a 401k before eligible retirement drawdown begins - you may face very steep tax liabilities.

If you would like more information, please visit us online at bills.com. We have also attached a free guidebook on budgeting and financial planning, including a section on getting debt free. We hope that this helped you to Find, Learn, & Save!

Your friends at www.Bills.com

Bill has answered all sorts of questions and has been able to provide those in need of financial guidance with helpful and valuable advice and information on their specific financial area of interest. If you need specific guidance on any of the above mentioned financial areas, feel free to Ask Bill your financial questions and get better informed.

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