Explain to me why it's a bad idea to borrow against your 401k?

[Anonymous]

So if your 35, have cc debt of 20k at 13.99% and you have 50k in your 401k earning much less than 13.99% doesn't it just make sense to get a loan against that 401k, pay off the cc debt and have the payments taken out of your paycheck automatically?
Assuming you have another 25 years to contribute to your 401k why is this such a bad idea?

[Anonymous]

It's not necessarily a bad idea but here are some things to consider--

are you really done racking up credit card debt, or is this a temp. patch?

if you lose your job you may need to pay the outstanding balance immediately

the market goes up and down and being out of it for a few good days can hurt your overall returns

[Anonymous]

Don't you pay a penalty and tax to withdraw from your 401k In most cases? So you'd have to factor that when doing the math.

[Anonymous]

sounds like you have a bigger problem with accumilating debt and not living within your means.

If you do it will be a band aid and then you will do the samething again. Fix the problem-over spending

[TheManWithAUsername]

It's a no-brainer on paper, but see the dangers PP mentioned.

[TheManWithAUsername]

Anonymous wrote:Don't you pay a penalty and tax to withdraw from your 401k In most cases? So you'd have to factor that when doing the math.

Not to borrow against it, but employers don't have to allow you to borrow against it.

[Anonymous]

TheManWithAUsername wrote:

Anonymous wrote:Don't you pay a penalty and tax to withdraw from your 401k In most cases? So you'd have to factor that when doing the math.

Not to borrow against it, but employers don't have to allow you to borrow against it.

I assumed if you borrowed against it you had to pay a penalty - or is it just that you have to pax the taxes on it (obviously) but no extra penalties...?

[Anonymous]

Anonymous wrote:

TheManWithAUsername wrote:

Anonymous wrote:Don't you pay a penalty and tax to withdraw from your 401k In most cases? So you'd have to factor that when doing the math.

Not to borrow against it, but employers don't have to allow you to borrow against it.

I assumed if you borrowed against it you had to pay a penalty - or is it just that you have to pax the taxes on it (obviously) but no extra penalties...?

You pay penalties for withdrawing, but not for a loan. Not all employers permit loans.

[Anonymous]

You know what sounds so logical to financial gurus? Don't accumulate credit card debt. Your 401k should be held almost sacred -- to be tapped in the most dire of circumstances. Can you just try to map out a severe plan to pay off that debt (or to pay yourself back quickly if you dwindle the 401k)? 401k is meant for retirement or perhaps a true unexpected emergency. Not because you had to have the rug at Bloomies tent sale.

[Anonymous]

I wondered about this too, but couldn't get any of the posters proclaiming it to be a dumb idea on that other thread to explain why.

In my case, I can only borrow a small amount (10% of the total, maybe?), BUT the 3% interest I pay on the loan goes right back to my account. I'm paying myself to borrow from myself. HOW is this not better than paying a credit card company a much higher rate?

[Anonymous]

what is your interest rate on your cc and year to date return on your 401k money?

[Anonymous]

As long as you're not withdrawing it totally, I see no problem with this. You're basically financing your own loan.

[Anonymous]

Anonymous wrote:I wondered about this too, but couldn't get any of the posters proclaiming it to be a dumb idea on that other thread to explain why.

In my case, I can only borrow a small amount (10% of the total, maybe?), BUT the 3% interest I pay on the loan goes right back to my account. I'm paying myself to borrow from myself. HOW is this not better than paying a credit card company a much higher rate?

I think it can be better but there are two risks that I see:

1) If you lose your job, the loan is typically due in full. How would you pay that? You should probably check what the interest goes up to if you can't or if there is some sort of penalty - it might be considered a withdrawal at that point which would mean taxes and penalty.

2) You haven't technically saved for retirement those years you were building up your 401k because you are taking the funds out and not getting the returns on your investments. In this market that doesn't seem like a huge issue but who knows where the market will be by the time you pay back the loan. You may have missed out on the opportunity to buy in a low market.

[Anonymous]

If you take a one-time loan from your 401(k) to pay off higher-interest credit card debt *AND* you cut up your credit cards - that is not a bad idea.

But if you think of your 401(k) as just another fungible source of funds, then you have a spending problem. You are robbing Peter to pay Paul. Your debt will mount, and you won't be able to pay back the loan, and then you'll be hit with withdrawal penalties, additional taxes, etc., etc.

OP, if you can't see the difference between the two approaches, you probably have a spending problem.

[Anonymous]

Anonymous wrote:If you take a one-time loan from your 401(k) to pay off higher-interest credit card debt *AND* you cut up your credit cards - that is not a bad idea.

But if you think of your 401(k) as just another fungible source of funds, then you have a spending problem. You are robbing Peter to pay Paul. Your debt will mount, and you won't be able to pay back the loan, and then you'll be hit with withdrawal penalties, additional taxes, etc., etc.

OP, if you can't see the difference between the two approaches, you probably have a spending problem.

Yeah, what he/she said^^