The Cons of Borrowing From Your 401(k)
Tapping your retirement savings to pay off debt usually isn't a good idea.
I have accumulated about $40,000 in my 401(k) plan at work. I’ve also racked up about $8,000 in credit card debt. Can I take a hardship withdrawal from my 401(k) to pay off my credit card bill?
Unless you are in dire financial straits – such as facing foreclosure – you probably won’t qualify for a hardship withdrawal. But you may be able to take a loan from your 401(k). If your plan permits, you can borrow as much as half of your balance, up to $50,000. In most cases, you can take up to five years to repay the loan with interest, which goes back into your account. A loan, while not usually advisable, can make sense if the rate you are paying on your card debt is higher than what you’re earning on investments.
Think long and hard before you tap long-term retirement savings to pay off a short-term debt. If you lose or leave your job, you’ll have to repay the loan within 60 to 90 days. If you don’t, it will be treated as a distribution subject to income taxes, as well as a 10% early-withdrawal penalty if you’re younger than 55 when you leave your job.
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