How to Avoid Tapping Into a 401k to Pay Off Debts

When you invest in a 401k plan, it is not always the best choice to access your funds before retirement. Although you can withdraw money for a specified list of emergencies such as payment of college fees, avoiding eviction from your house, medical expenses or disability expenses, it also has an early withdrawal penalty of 10%. Here are a few steps to help you avoid tapping into your 401k to pay off debts.

Instructions

Difficulty: Moderately Easy

1. Remember that 401k accounts should be strictly for retirement plans.
2. Plan wisely by maintaining your savings independent of your 401k investment. This will enable you to meet an unforeseen turn of events.
3. Get a loan on your 401k plan. This will help you avoid a premature withdrawal penalty and you can pay back the amount with interest. You can withdraw up to half your invested money but not more than $50,000.
4. Get a home loan for buying a new house rather than using part of your 401k plan. There are a lot of competitive offers from lenders out there specializing in home loans these days.
5. Use student loans (preferably a scholarship) for you child's tuition fees and college expenses. Many people have used 401k investments for these kind of expenses and will regret it later.
6. Borrow from your 401k only when you have no other choice considering that you will have to pay income tax on the borrowed amount. Once you’ve paid back the loan, you will have to pay your income tax again on the collective amount when you retire.

Tips & Warnings

• Avoid tapping into your 401k for credit card and other debts. Although you can use the funds for certain expenses as mentioned above, it is always recommended not to withdraw your investment in 401k for any kind of debt.