Episode 170: Should You Pay Off Debt With a 401k Loan?

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Today’s Smart Money Question:

Should you take out a 401k loan to pay off your debt? And does it matter what the kind of debt is? Today we’re going to tackle this common question and more to help you figure out your finances.

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(Click the featured times below to jump forward in the episode)

Here Are Just A Handful Of Things You’ll Learn:

Today we’re answering some common financial questions we receive. First up, should you take out a 401k loan to pay off debt, such as consumer loans, car loans, etc.?

We had a client recently who had $60,000 in credit card and car loan debt with this question. The first thing we’d tell you to do is review where your debt is and the interest rate that you have.

Interest rates are ridiculously low right now, so you could consider financing a car. With credit cards, you can probably find one with 0% interest for a year or so, but beware that the interest rate skyrockets after that.

So, first make sure you analyze your debt. But we recommend looking at every other option before taking a loan against your 401k. Hardship loans are different, but paying off a car or credit card is not considered a hardship.

You could try a consolidation loan to get rid of credit card debt. If you do take a 401k loan, make sure you know about the repayment process. It can differ by person and be 3 years, 5 years or longer.

Depending on your age, you could be subject to ordinary income taxes if you take money out of your 401k. When you take money out of a 401k, you’re diminishing your retirement growth.

Listen to the full episode or use the timestamps below to jump to a specific section.

2:20 – 401k loans

5:16 – Exhaust other options

10:05 – Selling property

 

“Look at every other option before taking a loan against your 401(k).“

-Matt Hausman

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