When it makes sense to borrow from your 401(k)


“First I would hammer out the expenses and see if there’s anything that can be done to get some money to throw on the credit card,” says Jim Holtzman, a wealth management adviser based in Pittsburgh.

Among the strategies Holzman recommends: Call your credit card company and ask for a lower rate. Negotiate with utilities to get a break for a while. Look for a credit counseling agency to negotiate with creditors. Shop at cheaper supermarkets, if you can.

“These are not fun processes to go through, but you’re really trying to reduce that burden,” he says.

There are times, however, when a 401(k) loan makes sense.

“If I look at a situation where the credit card debt is so high, the monthly payment is so high, and it’s just going to be compound interest on the interest, not knocking off the principal, that would definitely change my thinking,” says Holtzman.

One of the biggest benefits of a 401(k) is compound interest. Over time, it can generate a lot of wealth. But if your high-interest credit card debt is costing you more than your 401(k) will ever earn, that’s a serious problem, Holtzman says.

When looking for a 401(k) loan, it’s not an all-or-nothing, one-size-fits-all strategy, says Stephanie Genkin, a paying CFP based in Brooklyn, New York.

“You shouldn’t say, ‘just let me get this $20,000 back from my 401(k).’ Instead, see where you can get small pots of money equivalent to that,” she says. “It’s not meant to be your piggy bank.

“I had a young client who was in debt on a credit card, and we created a tiered plan where we were going to eliminate that debt – all within a month in her case – but we didn’t used one resource place,” she says. “We only took out a $5,000 loan from his 401(k) when he was at his peak.” She and her client also sold options purchase of shares that had been acquired by his company because the stock had performed very well.In addition to that, they also dipped into savings.


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