Should I Take Out A 401K Loan To Pay Off My Credit Cards?

I have taken out 401k loans before but, I have taken them out to use as down payments for buying homes. All in all no matter what you take the 401k out for the concept is the same.

Unless you are not able to make your credit card payments at all and your FICO credit score is in jeopardy, this might not be a good idea right now. Be aware you can end up paying taxes twice on the money you borrow. If your FICO credit score has already gone bad due to late payments and your interest rate has sky rocketed to 30%,a 401K loan might be looking pretty good and you might think the tax penalty may be worth it.

The problem is we are in the middle of a recession. There is a possibility that you may loose your job. I have friends who have been with their company for years, In some cases over fifteen years, who have lost their job. No matter how much seniority you have you can still get laid off without any warning. If you were to be laid off and you have an outstanding 401k loan, you will have to repay the loan within a short period of time. Typically the time frame is 90 days. If you don't pay it off within that time frame your 401K loan will become a 401K withdrawal. This means you will have to pay tax on the entire amount. On top of that you will have a 10% early withdrawal penalty if you are under 55 when your service ends. Would you be able to pay back the 401K loan if that were to happen? You certainly wouldn't be able to take it from a credit card would you?

Something else to consider is your retirement. If you no longer have a your 401K, what else do you have for retirement? If retirement isn't on your mind it needs to be. If you can't pay your credit cards you may be thinking of bankruptcy. There are other options before things go that far, but the good thing with bankruptcy is(if there such a thing when it comes to bankruptcy)the money in your 401K or IRA is protected under bankruptcy law. You will not be required to payoff your credit card debts with your retirement savings. Don't blow your retirement on paying off your credit card debt.