Would it make sense to go into 401k to pay down debt?

[Anonymous]

I am in quite a financial mess after a divorce. Would it make sense to take money from my 401k to get rid of alot ofy debt?

[Anonymous]

Depends what kind of debt and at what rate. In general though no.

Exception: If you are paying 25%+ interest on some CC debt, I'd argue yes - but id sooner find a way to massively cut back on expenses and pay down the debt without touching 401K. There's no way to 'go back' and put it back once you take it out.

[Anonymous]

Can you take a loan on your 401(k)? Then you can "go back" and put it back in while you repay it. I know the financial advisers all say not to do loans, either, but ....

[Anonymous]

Anonymous wrote:Depends what kind of debt and at what rate. In general though no.

Exception: If you are paying 25%+ interest on some CC debt, I'd argue yes - but id sooner find a way to massively cut back on expenses and pay down the debt without touching 401K. There's no way to 'go back' and put it back once you take it out.

Aside from getting a low-interest loan against it, then going back and "putting it back" on the appointed schedule.

[Anonymous]

No, it wouldn't. Cut expenses while looking for ways to make more money.
Think of it this way-every time you buy something, you are paying the price plus the interest your highest credit card with balance charges.
Do your best for a month or 2 and see if the CC balance went down.If not, you definitely need a second job.Don't touch the 401k.You don't have a Roth,do you?

[Anonymous]

No.

[Anonymous]

Not really. Paying down debt by reducing your savings doesn't do much for your financial health in most cases.
What debt do you have? What assets?
The first best is to increase income and/cut expenses.

[Anonymous]

I'd only do it through a loan. Taking it out would mean Uncle Sam gets nearly 50%.

BUT -- If you think your job is in any sort of risk, then don't even take out a loan.

You'd have to pay it back in 90 days or pay taxes (with the 10% penalty) on the entirety.

If the debt is high-interest (e.g. credit card), then it might not be a bad idea to have a 401k loan pay off the credit card debt.

IMO, it's no use to save save save and be miserable and indebted in the interim.

Saving is used to help you through hard times/finance future consumption.

Second job -- see if you can find Internet piecework to do online, for like 10-20 hours a week at $10-$20 an hour. If you have kids, you might find childcare eats up anything you might make in a WOH job.

[Anonymous]

Anonymous wrote:Can you take a loan on your 401(k)? Then you can "go back" and put it back in while you repay it. I know the financial advisers all say not to do loans, either, but ....

Part of the reason that you are advised not to do this is that you will end up paying taxes twice on this money. You "borrow" money from your 401K, when you put it back in, you are replacing it with money that you've already paid taxes on at your current (likely higher than retirement) tax rate. Then when you retire and you take money out again, you will be paying taxes again at your retirement rate. The point of 401K is to pay taxes once on the money at the lower post-retirement tax rate.

If at all possible, you need to cut your expenses down and pay down your debt without accessing tax deferred money.

Note that this does not apply to a Roth 401K and so there is one less argument against borrowing against a Roth 401K.

[Anonymous]

I always think about doing the same thing, but I won't even take money out of my savings to pay off my credit cards. I don't keep a huge amount of debt, but these past couple of months I have buckled down and been paying it off in large chunks. I will not touch my 401K or savings. YOU WILL NEED IT LATER. I am already behind when it comes to saving for my retirement. DO NOT TOUCH IT. It doesn't exist.

[Anonymous]

The debt is impacting both her retirement AND her ability to live in the here and now.