How to Use 401k Money to Pay Off Debt
If you have a large amount of debt and money sitting in your 401k, you may be interested in using the money to pay down your debt. Even though it can negatively impact your retirement savings, it could make sense to pay off high interest debt before saving more for your retirement. You can access the money you need by using a 401k loan or by taking a taxable distribution from the account.
Other People Are Reading
Instructions
-
-
1
Contact your 401k provider about getting a 401k loan. 401k loans are typically offered by most 401k providers. You can borrow up to 50 percent of the balance of your 401k through a loan and repay the money over a long period of time with interest. By taking a loan, you do not have to pay any taxes on the distribution or an early distribution penalty.
-
2
Complete the process of requesting a 401k loan. Your provider will generally direct you to a loan request form that you can fill out online. In some cases, you may need to fill out a document, sign it and mail it in to the company. The provider will mail you a check for the amount of money that you have requested.
-
-
3
Take a taxable distribution from your 401k. You may be able to qualify for a hardship withdrawal if you cannot take out a loan. With this type of withdrawal, you may have to pay a 10 percent early distribution penalty on the money as well as pay income taxes on the amount that you take out. Some types of hardships, such as excessive medical debt, can get you the money without penalty, but you still have to pay taxes on it.
-
4
Use the money that you receive to pay off your debts. If you have credit card balances, you may want to contact the credit card companies to make sure that you get the accurate pay off balance before sending a payment.
-
5
Make payments back to the 401k company for your loan. If you borrowed the money from the 401k provider, you will need to make regular payments back to the provider until the balance is repaid. If you do not repay the balance according to the terms of the loan, your distribution will count as a taxable one and you will have to pay the early distribution penalty also.
-
1
References
More Like This
Comments
-
kcs2009
Oct 12, 2009
Is there a way to negotiate with 401k provider to avoid their penalty charges due to early withdraw for hardship, avoid foreclosure in home? Currently unemployed and not contributing to 401k plan, but do need to withdraw entire amount holding for hardship, but would like to avoid paying additional penalties/fees?
