401k Debt Repayment

There will always be valid reasons or excuses for doing anything. My professional opinion is using your 401k for repaying debt is typically ill-advised. You should not dip into your 401k for the purpose of the purpose of paying down debt. You are just robbing your future self. A retirement plan is meant to be for retirement. However, as with anything in life things can happen and when push comes to shove people are forced to do things they know they will likely come to regret later.

Anecdotal Evidence

There aren’t as many anecdotes of consumers that relied on their 401k to pay down debt and have had a positive experience in doing it. If anyone mentions it, there experience is almost always negative and there tends to be a tremendous amount of regret around the idea. However, there are times when things are unavoidable. If this is something that just cannot be avoided it is important to remain strategic when understanding tax implications and setting a repayment plan for the 401K withdrawal.

Main Benefits

The main benefit will be savings from debt-based interest rates payments. If you borrow from your 401k at a lower interest rate than typical high interest rate credit card debt you can consolidate in a way and pay yourself back via the 401k loan. In this scenario you will only save on interest if you are not getting penalized for early withdrawal or your 401k loan is a lower interest rate option than your current debts.

Disadvantages

The disadvantages abound: tax implications, early withdrawal penalties, loss of compounded growth. These are not good financial moves to make and typically something that should look to be avoided at all costs.

It’s important to try to avoid any scenario in which you are prematurely tapping into your 401k to take care of debt. Despite how it might feel there are likely still other viable options out there.

Options to Consider Before Opting to Withdraw from 401k Include:

A. Consider reducing your budget and saving specifically for the purpose of debt repayment.

B. Debt consolidation loan to lower your interest rates.

C. Debt relief option if you are considering negotiating and paying back less than you owe.

D. Increasing income or picking up a secondary source of income to supplement debt payments.

My both professional and personal opinion is that most individuals who go through with early withdrawal of a 401k end up regretting it, due to the incurred penalizations. The penalty and tax implications alone make it an undesirable option to say the least, however I understand why some individuals might think this is an appealing option.

Nathan Morris once said: "When you borrow money you are robbing your future self".

This is why early withdrawal from a 401K is like a "Double Whammy". It really is double as bad as it might appear on paper. Separation of retirement into a 401k option is a beautiful thing and you really should avoid messing with it unless it is something along the lines of a dire emergency! Your future self will thank you for it and it might mean you retire earlier.