After the recent economic meltdown in the US, many people have incurred insurmountable amount of debt. In such situation, debt consolidation programs can help you pay off the debts. Due to poor credit report you might face problem of getting debt consolidation loan. Therefore, you can borrow against 401k to consolidate your debts. Once you pay off your debt you can regain control over your financial situation and again start making contribution to your 401(k) plan.
1. You can approach the human resource department of your company to know whether there is a possibility of getting loan against your 401k instead of withdrawing from the plan. The IRS will not impose tax penalty if you do not withdraw money from your account. You are required to pay interest rate on the loan amount that you borrow from the 401k plan.
2. You can consult your 401k administrator regarding the evaluation of the Summary Plan Description (SPD). You will be given the terms and clauses under which you are allowed to withdraw money from your 401k account. You are eligible to take out money from 401k if you are facing severe financial hardship.
3. Make sure that you withdraw the amount you require to pay off your debts otherwise you might put your retirement savings plan at risk. You need to pay penalty if you withdraw money from 401k before your retirement. You can avoid this kind of penalties by taking out the money in annual installments. But it might not be beneficial to people withdrawing money for paying off their debts.
4. Once you get the money from your retirement account make sure you immediately use it for paying off your owed amount. Once you eliminate your debt then promptly start working on rebuilding your credit rating.
5. After you pay off your debt start your 401k contribution for long term growth. If you borrow money from your company then you are required to repay the loan and it will be deducted from your monthly paycheck.
Therefore, if you take out money against 401k then you can pay off your owed amount without damaging your credit report.