Many time individuals come into a marriage with a lot of debt. Many couples want to start off their lives together no longer tied to decisions from their youth with only the future to look at. One way many people see to fix the situation is by using their 401(k) to pay off credit card debts.
Leave Things Alone
To use your 401(k) to pay off credit cards can be more detrimental than you might think. The 401(k) is designed to help you save money for retirement; this cannot be done if you are removing money from your 401(k) to pay off credit cards. This can be a problem for several reasons.
- The future is unknown. It may seem like it is not going to matter because you are able to pay everything you need to now. When you hit retirement and do not have a steady income because your retirement was depleted what would you do?
- Taxes can be anywhere in the future. It is common knowledge that taxes are not decreasing. Without the ability to see into the future you will not know what tax bracket you will be in. You may end up losing a lot of money because when you were younger you used you 401(k) to pay off credit cards.
- The Social Security program is not one that is always the same. As the years change so does the program. At present, the program is headed into a bankrupt situation. This can be devastating for someone who solely depended on this for their retirement income because you used your 401(k) to pay off credit cards.
- If you decide to use your 401(k) to pay off credit cards then you need to think about the immediate concerns. The most important concern is that based on which type of retirement account you have you may be paying a penalty fee for withdrawing money. On top of that, income tax is also required from the amount that you have decided to withdrawal. This can cause the money to dwindle more than anticipated and leave you with considerably less money in your account for future use.
How to Get Money Out
There are two ways for a person to use their 401(k) to pay off credit cards. Both of the ways can cause troubles for an individual if they do not know about it up front.
- You can take out a loan from your 401(k). This is just like taking out a loan from other places. You will have to pay it back, and it is just transferring debt from one location to another. The desired goal of freedom will not be accomplished because of the transfer of debt. In order to pay back the money you will be using an after tax payment which is different than a before taxes like it is normally withdrawn. In addition, if you use a loan from your 401(k) to pay off credit cards and you are terminated, the balance due and interest will be required immediately as payment in full.
- When you are looking to take the money out directly then you do not have to pay it back over time. When you take out money from you 401(k), you usually have a penalty that needs to be paid. Any early distribution can cost you a 10% income tax penalty on whatever money is removed.
Getting money out is simple no matter which way you choose, however each comes with many negative side effects.
The problem is that possible alternatives are not desirable. It seems easy to take out the large amount of funds from your 401(k) to pay off credit cards. However, the best option is truly to just continue with whatever debt payment plan that you have already established. If you have none established then creating one would be the best suggestion that anyone could give you.
If you are looking to pay large amounts of money at once, there are some options. You could use your income tax return, or the two extra paychecks you get per year. These are two ways that you can dedicate lump sums to be placed on to your debts rather than using your 401(k) to pay off credit cards.
Another option might be to ask for help or guidance about how to manage your funds. A debt counselor might be of service in this case.
It might seem simple and enticing to provide a simple way goes getting right of your debt. However, using your 401(k) to pay off credit card is not not always the best idea. There are several pros to doing it, mostly to eliminate those debts. The cons on the other hand are many and can damage your future without you thinking about it.