The Cons of Borrowing From Your 401(k)

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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.

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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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