John E. Pytte
The Impact Of Borrowing From Retirement to Pay off Debt
Needless to say, debt is part of life, especially in the business world. Businesses sometimes thrive on debt-derived capital; borrowed capital encompasses a significant portion of the business financing. Loans are readily available mostly from financial institutions if you meet certain criteria. However, the big issue arises when it gets down to loan repayment. How to get adequate funds to meet the terms of your loans?
Like businesses, individuals sometimes have to incur debt as part of daily living. As is expected, enterprises and individuals are supposed to start paying off debt from operational income, but it does not always work out as planned. If payback resources are limited, some people opt to borrow from their retirement plans like the popular 401k.
Just like borrowing from any other source, this may affect you positively or negatively. All kinds of borrowing carry a risk factor with them. For starters, interest is a common element associated with borrowing. However, it varies depending on whatever financing option you choose. A 401k loan is no exception. It pays interest and also affects returns on your long-term investment or retirement.
Paying Off Debt from Retirement Savings is Usually Not a Good Idea...
Borrowing from your 401k is against the professional advice of financial experts. The sole purpose of saving for your future is to lead a comfortable life even when you are past the working age. Therefore, borrowing from this account jeopardizes your future, which is a big risk considering the physical limitations as you age. However, what would you do if you are left with no other option? The journey to retirement is long, and in between now and then lays a lot of uncertainties. With bills to pay, basic household expenses, and other costs you cannot do without, then you may resolve to turn to your retirement plan.
From a professional’s angle, 401k loans are situational. These loans are not for every other person. 401 loans are complex and require special consideration. The impact of taking money out could be detrimental, and that’s why you need to step back and rethink your decision before you go ahead.
For starters, cashing in on a 401k is costly. Opting to withdraw from retirement attracts both state and federal income taxes. Moreover, it also carries with it a 10% penalty on the total withdrawal amount. As if that’s not all, you will have to sacrifice the amount of withdrawal from your retirement since you are not bound to pay it off. Secondly, you could opt to borrow the sum as a loan. In the case of default, the 401k loan converts into a withdrawal that exposes you to taxes and penalties.
When borrowing from a 401k loan, it is wise to inquire about the repayment period. One that requires repayment within a short period is considered highly dangerous. In an instance of job loss or quitting, you have a 60-day grace period before which your 401 loan balance is converted to withdrawal. The inquiry forewarns you on what to expect if things take a wrong turn with your employer.
With this in mind, you may opt to skip on the risks associated with 401k borrowing by obtaining a consolidation loan or bankruptcy instead.In the case of bankruptcy, your 401k is protected and cannot be touched by your creditors. Moreover, if you would like to avoid bankruptcy, you can consider paying off debt with 401 borrowing. However, experts advise that you make informed calculations before making the financing.
Does it Consolidate Debt?
In some instances, a 401k financing may place you in an ideal situation whereby you have your debt consolidated. This may lower your monthly expenses and increase your discretionary income. Besides, with this freed up income, you can contribute more to your retirement, and this, in turn, increases your potential savings in retirement. Also, interest paid on this loan is for you rather than for creditors. In the long-run, the initiative leads to wealth preservation. With these guidelines, you can make a wise choice in your borrowing decision today through informed financial calculations.
Georgia Debt Relief can help with complicated questions like these and advise you on a best possible course of action based on your unique circumstances. Call us today with your questions!