Ask Terry Questions Using 40l(k) to pay off credit card debt

Using 40l(k) to pay off credit card debt

By Terry Savage on August 25, 2015 | Financial Planning / Retirement

My husband and I have a credit card balance of $15,000, the balance owed on our home is $45,000 and we have a HELOC balance of $38,000. Our assets include $25,000 in a joint savings account for emergencies. We both have individual savings accounts each with over $5000. His 401k retirement is over $460K and mine due to working part-time for 14 years is over $160K. Our combined annual income is $158,000. I am 58 and my husband is 61. My husband would like to take out a loan from his 401k to pay off the credit card and do some home repairs or he thought of using some of the money in the emergency fund. I would like to pay off the home mortgage with the 401k loan since it would be paid anyway by November of 2016 and we are not getting much benefit from the mortgage interest on our income taxes. The money we pay back in the loan goes into his 401k with a very low interest rate of 3%. The monthly payment for the loan is much less than our monthly mortgage. I hope to work as long as I can part-time, he is planning to retire at 65 or 66. Please advise us on this matter and if there are any other issues we have to consider when making our decision. Thank You.

Terry Says:  Honestly, I don’t love this plan.  I almost never advise  borrowing from a 40l(k).  First, you are losing all the growth on the money you take out of your 40l(k).  Second if you lose your job,  it will be considered a withdrawal unless you can repay immediately, and so you would owe taxes (and if it is your account, you’d owe a 10% early withdrawal penalty).

What I’m really seeing here is a lack of discipline — if you want the Savage Truth!  Earning that much money, you should be able to double the minimum monthly payment on your credit card, and keep paying that same amount every month (double the current minimum) and your card will be paid off in less than 3 years!  And while you’re at it, try doubling the payment on your HELOC.   If you can’t save enough currently, you might want to dig into your emergency savings, but leave at least half for the emergency that will inevitably arise.  That plan will really cut into your debt.

When you get that done, reassess where you stand with your mortgage.  And don’t plan to retire and collect SS before your FULL retirement age, which will be close to 67.   At that point, you will get SS and a nice withdrawal every year from your 40l(k).   But if you proceed along the path you describe, I see financial disaster in your early 70s.

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