When you are finding it hard to meet the minimum payments on your credit cards, you may be tempted to use your 401k to pay off credit cards. But in most cases this is a huge mistake.
Your 401k retirement plan benefits from various tax incentives to help persuade you to save for your retirement. If you cash it in early you can incur large tax penalties. Sure you may get some money to pay down your debt but it probably won’t be as much as you thought or perhaps need.
The Long Term Impact Of Using 401k To Pay Off Debt
The long term financial implications of using a 401k to pay off debt are also worth considering. People are living longer and need more money in retirement than ever before. The earlier you start saving for your retirement years the better as you will benefit from compounded growth on your investments. Compounding is the “secret” which explains why people who save $100 a month from the age of 20 will have a lot more money in their plan than those who start at 40 with $1000 a month. But if you cash in these plans to pay down debt, you will not only lose this past growth but also the future potential growth this money could have achieved. You do not want to face poverty in retirement when you will be too old or infirm or unhealthy to work.
So how can I pay down credit card debt without touching my retirement plans?
It really depends on your personal circumstances and the amount of debt you are in. If you currently have a good credit rating and can raise some extra cash, have a look at our help with credit card debt article it will explain how you could rearrange your credit card debt to pay it off quicker. Sometimes it is not possible to get a second job or increase your income yet you cannot meet or pay more than your minimum monthly payments and so filing for Chapter 7 or Chapter 13 bankruptcy may be the answer. Some people want to avoid bankruptcy at all costs and that is completely understandable. But they often make the situation they are in worse by not taking advice. They can meet advisers who persuade them to take out a debt consolidation loan which could be a huge mistake. Most people end up owing more than they started when they consolidate their debts as they have the new loan and they run up credit card debt again too. So don’t take this option.
Book an appointment with a bankruptcy attorney
Nobody is suggesting that bankruptcy is your only option but you do need professional advice from an expert in debt resolution. The best thing you can do is book an appointment with a bankruptcy attorney and ask them for advice on what you should do given your personal situation. If you pay the lawyer for his opinion you will not be forced or feel obliged to take any particular route.
Whatever you do, don’t put your head in the sand as your situation is not likely to improve unless you take action. The stress of being in debt takes its toll on your personal relationships and your health. So don’t touch your 401k to pay off credit cards and get proper advice instead.