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HomeBlog Debt ReliefShould You Take Money Out Of Your 401(k) To Pay Off Debts?
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Should You Take Money Out Of Your 401(k) To Pay Off Debts?

May 12, 2013 by National Debt Relief

Stress over debtIt’s hard to put a good face on debt. While some experts in personal finances believe there is both good debt and bad debt, most people get into trouble with bad debt – credit card debts, personal loans, lines of credit and medical bills. If you’re trying to cope with big debt and have a 401(k) it can be mighty tempting to use some of that money to clear those debts and get a fresh start. But before you do so, there are some things that you should take into consideration

It will be taxed

The first thing to consider is that unless you can qualify for what’s called a hardship exception, you will have to pay taxes on the money that you withdraw plus a 10% withdrawal penalty. Hardship exceptions include immediate and substantial medical expenses, costs related to buying a home, tuition and educational fees related to it, payments required to prevent eviction or foreclosure, funeral or burial expenses and some expenses required to repair damages to your principal residence.

If you don’t qualify

If you haven’t had any of these hardships, we’ll assume that 35% of money you take out of your 401(k) will go to Uncle Sam. For the purposes of this example, we will also say that you need to get $10,000 to get pay off your debts.

There’s a formula

There is a formula you could use to determine how much money you will have to withdraw the get the $10,000 you need. The net/net is that you would need to withdraw $15,385 to have the $10,000 you need to pay off your debts.

The good news

The good news is that you will no longer have those debts hanging over you and you will no longer have to make those ugly payments every month. Unfortunately, there are costs that are more difficult to see. This is because they won’t happen until you retire.

An example

If you were to leave that money in your 401(k) and earn 5% interest a year, your money would double every 14 years. If you were to retire at 66 or 67, it would have doubled twice and would have grown to around $60,000. Many experts on retirement say that you can safely withdraw about 2% of your principal each year after you retire. The $60,000 would translate into about $1800 per year or $150 a month for the remainder of your life and you would still have the original $60,000.

Take it as a loan and not a withdrawal

A better option might be to take out a loan from your 401(k) instead of a withdrawal. Since it’s a loan you wouldn’t be required to pay taxes on it. You will have to pay interest on the money you borrow but it should be much less than the interest you’re paying on your credit cards. And here’s the really good part. You’re basically paying interest to yourself.

What to watch out for

If you choose to take the money as a loan, there are some things to be aware of. For example, with most 401(k) plans, if you lose your job, you must repay the entire loan amount. Second, you need to make sure you pay back the money within five years or again, it will be treated as ordinary income and taxed accordingly.

A better option

Many people have found that a better option than borrowing from their 401(k) is to get rid of their debts through debt settlement. This is the only option that can reduce your debts to help you become debt free in 24 to 48 months. Plus, if you choose a good debt settlement company such as National Debt Relief, you’ll have a very affordable payment plan and your retirement money will still be sitting in your 401(k) quietly earning interest.

Do you qualify for debt consolidation?

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National Debt Relief is one of the largest and best-rated debt settlement companies in the country. In addition to providing excellent, 5-star services to our clients, we also focus on educating consumers across America on how to best manage their money. Our posts cover topics around personal finance, saving tips, and much more. We’ve served thousands of clients, settled over $1 billion in consumer debt, and our services have been featured on sites like NerdWallet, Mashable, HuffPost, and Glamour.

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Moderate National Debt Relief Caller: Misty Transcribed WE 3/28/2021 Misty: The call, it may be recorded. Can you tell me do you recall how you heard about NDR? KYLE: I googled it, and then it went to Better Business Bureau or whatever it's called. And you guys have the highest rating. Misty: Which service did they actually provide for you? KYLE: So, basically, I enrolled all my credit cards into the program. And I stopped paying. And then, the lawyers reached out to the company's lawyers. And they've been settling, stuff like that. Misty: How would you describe your interaction that you had with your representative that you worked with on getting everything squared away? KYLE: Oh, it was excellent. Misty: Do you feel that the door of communication is still open if you have any questions or concerns? KYLE: Yes. Yes, I actually have been meaning to call you guys, too. [Laughs] I just haven't had time, but yeah. Misty: How did NDR work with you on your payment plan? Do you feel that they're flexible if you need to change the date? KYLE: Yeah. Yeah, if I ever had to. I don't need to, but I know that if I ever had to, I can just call them. Misty: What are your thoughts on the cost in relation to the quality of service you've received from them? KYLE: I'd say 10 out of 10. Misty: How has working with NDR impacted your life so far? KYLE: It's helped out a lot. I was really underwater with bills, and now I can breathe. And I managed it a whole lot better. Misty: Have you actually finished the program or are you still working through it? KYLE: Still working through it. I got one more card to settle. Misty: But we're making progress though, right? KYLE: Absolutely. Yeah, I think one of my cards was 17,000. They settled it for 6,000. That was pretty cool. Misty: Are there any other comments or even any suggestions on how they might improve their service for you? KYLE: Well, what I was gonna call them about was just as far as the payments that I make, and is there an actual date as to when it stops at 43 months, or if that was an estimated date? So, I guess I should have gotten more clarification in the beginning. But that's kind of what I had questions about. Misty: Well, that brings us to the star rating, which is 1 to 5. So, how would you rate your experience with NDR at this time, and 1 would be very dissatisfied, 5 is that you would recommend them to a friend at this time? KYLE: A 5. Misty: What would you say to that friend who asked you about it, just maybe one or two things you might tell them before they decide who they're going with? KYLE: That your credit is gonna take a hit, but it's gonna bounce back, and you'd be fine. Misty: Would it be okay if we shared your feedback on ConsumerAffairs.com for others to read it or in a similar point in their life where they're like, “I'm not sure who I need to go with,” but they can read reviews of people that have started the process with NDR? KYLE: Yeah. Is it gonna have my first and last name on the review? Misty: No, sir. Only first name, and we do not publish any contact information. KYLE: Okay. Yeah, that’s fine. Misty: I have kylecunningham1873@gmail.com. KYLE: Yes, ma'am.

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Kyle Cunningham
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