A recent report from the New York Times noted that borrowing against a 401(k) plan may help reduce credit card debt, especially if the consumer who considers it has a good amount in their account. However, people should keep in mind that they are borrowing from their future living expenses, which should cause them some pause before they go through with it.
“Many 401(k) plans allow account holders to borrow money, but most financial advisers would say you should use this feature only as a last resort to pay off credit card debt,” the Times said.
The paper noted that not every 401(k) plan allows consumers to borrow against it. Even some of those that do may put a limitation on what the person can used the borrowed money for, which would include avoiding an eviction or paying for an education.
Furthermore, there are rules from the Internal Revenue Service to consider. For example, the IRS requires that loans against 401(k) plans be repaid within five years unless the funds are being used to purchase a house.
“The IRS requires the loan to be repaid in equal payments, at least quarterly, over the life of the loan,” the report from the paper said.
If consumers don’t follow these repayment rules, the IRS may consider the loan an early distribution, which would be given a 10 percent penalty and taxed.
Rather than borrow against their retirement investments, consumers may consider other strategies for paying off credit card debt. For example, some people may try to find other credit cards that offer lower introductory rates and transfer their old balances.
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