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Should I Borrow From My 401K To Pay Off My Credit Cards?

Brian V. Lee Bankruptcy Attorney www.Lee-Legal.com

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If you are struggling with credit card debts, you may be

looking for any possible options available to you in order to

resolve your debt issues. One option you may consider if you

have money invested in a 401K is to try to access that money

and use it to repay your credit card debts.

Taking money out of a 401K to repay debts is a very bad idea

and is something you should pretty much never do, since you

put your retirement at risk and you are hit with large taxes

and penalties for early withdrawal. Because of the huge

consequences associated with actually withdrawing from a

401K, many people who look to this retirement account to

help them pay debts will instead consider borrowing against

their 401K.

In general, you are permitted to borrow money from the 401K

account that you have, so you could technically pursue this as

an option to repay your credit cards. When you borrow the

money, you do not have to pay penalties and taxes as you

would when you withdraw the cash- although you do have to

pay interest on the loan. The fact that you don’t have to pay

penalties can make it seem as if this is an attractive choice fro

debt repayment, especially since the money is just sitting

there. The reality, however, is that this is almost as bad of an

idea as it is to just withdraw money to pay.

● ● ●

Taking money out of a 401K to repay debts is a

very bad idea and is something you should

pretty much never do, since you put your retirement at

risk and you are hit with large taxes and penalties

for early withdrawal ● ● ●

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Borrowing From Your 401K Puts Your Future in Jeopardy

There are a lot of reasons why borrowing money from your

401K is a very bad choice to repay your credit cards.

One of the biggest issues is that if you lose your job or need to

make a change in your employment, you may be required to

pay back the 401K loan in full. If you have already used the

cash to repay your credit cards, you may not have the money

to pay back the loan. This can put you into a situation where

you end up losing out and needing to pay penalties since you

cannot repay the loan as required. This can put your future

retirement security in huge jeopardy as you could lose a good

chunk of your retirement savings as a result.

Another problem with borrowing from your 401K to repay

your credit card debts is that the money is no longer in your

retirement account working for you. When you invest your

money in a 401K, the money is supposed to grow so you have

enough to pay to support yourself in your old age. If you take

the money out of investments, you’ll lose the growth, which

compounds over time.

You will never get back the months or years of growth that

you lost during the time when your money wasn’t invested,

● ● ●

One of the biggest issues is that if you lose your job or need to make a change in

your employment, you may be required to pay back the

401K loan in full. ● ● ●

● ● ●

When you invest your money in a 401K, the

money is supposed to grow so you have enough to pay to support yourself in your

old age. If you take the money out of investments,

you’ll lose the growth, which compounds over

time. ● ● ●

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which can mean you will need to delay your retirement or end

up with a skimpy nest egg that doesn’t necessarily see you

through your golden years.

Bankruptcy Protects Your 401K, But Not

401K Loans

Outside of the risks of losing your job and not being able to

repay your 401K loan, there are also other problems with

borrowing from your retirement account as well.

Another problem that occurs if you take a loan against your

401K is that you may find yourself needing to file for

bankruptcy anyway. When you are in deep enough debt that

borrowing from a retirement account seems to be your only

option, there is a good chance that a bankruptcy filing is an

inevitable eventuality.

If you do end up filing for bankruptcy anyway, you’ve taken

the 401K loan out for no reason, cost yourself retirement

money and put your future in jeopardy- all for no benefit. The

bankruptcy code protects your retirement accounts whether

you file for chapter 7 or chapter 13, so if you just file in the

first place, you won’t put your financial future at risk by using

your retirement accounts to make a hopeless debt repayment

effort.

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Bankruptcy after taking a 401K loan will also, in many

situations, have a worse outcome than if you had filed for

bankruptcy before taking the loan. If you have taken a loan

against your 401K, the trustee in your bankruptcy proceeding

may not necessarily allow you to repay that loan as a part of a

chapter 13 repayment plan. This is because the money you

would need to use to pay yourself back would thus be diverted

from other creditors who are entitled to repayment under a

chapter 13 filing.

Thus, while bankruptcy normally would have protected your

401K, the fact that you took the loan out could end up with

your retirement account being put into jeopardy.

Making Smart Choices About Debt

Repayment

The inherent problems associated with using a 401K to repay

credit card debt are illustrative of the complexities of debt

repayment. What may seem like a good idea and a responsible

choice- taking a lower interest 401K loan to try to repay debts

that are higher interest- could actually end up backfiring and

hurting you.

You don’t want to find yourself in this situation, which means

you should always consult with an experienced debt relief and

● ● ●

The inherent problems associated with using a

401K to repay credit card debt are illustrative of the

complexities of debt repayment. What may

seem like a good idea and a responsible choice-

taking a lower interest 401K loan to try to repay

debts that are higher interest- could actually end up backfiring and hurting

you. ● ● ●

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bankruptcy lawyer if you have debts you do not believe that

you can handle on your own.

About the Author

Serving clients in the DC-

metropolitan area since 2005, attorney Brian V. Lee is licensed in

Virginia and the District of Columbia. He is also licensed to practice in Maryland federal and

bankruptcy courts.

Brian provides client-oriented legal counsel

to businesses and individuals on a wide variety of complex legal and

financial issues.

Brian Lee runs Lee Legal, a full

service bankruptcy and litigation law firm with offices located in

Washington, D.C. (DuPont Circle) and Virginia (Old Town Alexandria).

Lee Legal provides skilled, comprehensive bankruptcy and litigation representation. Every

client receives a free initial consultation.

Locations:

1800 Diagonal Road Sixth Floor

Alexandria, VA 22314 (703) 879-2870

1250 Connecticut Avenue NW

Second Floor Washington, DC 20036

(202) 448-5136

www.Lee-Legal.com