Are you struggling with outstanding debts? Are you planning to settle your outstanding balance to ease your debt burden? If the answer to both questions is yes, then my next question would be how have you planned to pay down the settled amount? That’s the most difficult question that comes to the debtor’s mind during the settlement procedure. In extreme situations, sometimes the bizarre idea of cashing out 401(k) plan for credit card debt settlement comes to the debtor’s mind but is it at all a wise idea? Actually the decision of tapping into 401(k) plan to settle credit card debts largely depends on several factors. Read on to know more about them.
The debt amount-
Actually, the decision whether you should take out a loan against your 401(k) plan or cash out the plan to settle your accounts mostly depends on the number and quality of the outstanding balance that you have. In case you find out that your 401k money is not sufficient enough to mitigate all your credit card bills and you will only be able to cover couple of your debts by exhausting your retirement savings then it will be reasonable to discard this idea. Remember, the more you owe, the less likely you can settle the amount with the help of your retirement savings. Therefore it’s just not worth dispersing your retirement savings only to end up right where you started.
If you figure out that 401k loan will hurt your paycheck return or most importantly, will hamper your budget you and you might have trouble making your mortgage payments, discard the idea of using 401 k plan for settlement. You can Approach this matter from a different angle as well. Check whether you are willing to refinance your mortgage in order to settle credit card debt. If yes, then you can go with the plan of cashing out your 401(k) plan if not, consider bankruptcy as the better option.
The next point of consideration is how fast you are heading towards your retirement age and the amount of your retirement savings. Actually before assessing these factors you need to calculate how long it will take you to repay the 401k loan, and the loss that you will incur in your plan in the meanwhile. If you find out using your 401 (k) plan will delay your retirement or affect your ability to continue, better avoid this plan.
The decision largely depends on your job security as well. Suppose you borrow an amount against your 401 (K) plan and the get terminated or decide to resign you will be forced to transform your loan to disbursement and will incur taxes and penalties consequently.
Last but not the least, in spite of the aforementioned points, you can deny the fact 401(K) could be a good idea to settle your debts as your retirement money is tax deferred which indicates when you show this bill, you pay no taxes on it. Tapping into your 401 k plan could be considered as a gamble. If you win this gamble, you can get rid of all your credit card bills, but if you lose, you will permanently lose the little money that you have saved for your future financial security.