Question

So with my tax return I paid my property taxes on my car ($600) and completely paid off 2 credit cards equaling about $1500 between 2 of them. I have another cc with almost $7k on it at about 24% interest, minimum payments are about $134/mo. So I decided to go ahead and apply for a loan from my 401k to pay off that whole balance as my interest rate is just shy of 6% and the payments will just automatically come out of my paycheck bi-weekly. So when it’s all said and done I’ll have that loan paid off in 2 years time or 1 year if I decide to use next years return to pay off the remainder. If you were me would you cancel that cc or would you just hide it away for emergencies only? It has $8400 limit, but the interest is asinine imo.  

Answer 1

I would say until you have a comfortable saving for an emergency say 5k I would just hide it away.  

Answer 2

Ask a tax person first doing a withdrawal from 401k could greatly increase your taxes next year.  

Comments

@aphasia it’s never effected my tax returns in the past years. My 401k is through my employer and is matched 50% up to 6%. The investment company that my employees use actual show us the health of our retirement plan and what it would look like after my loan has been taken out. I was am still am at 100% savings for my retirement income since I started saving the max match when I was 19 years old.  

Answer 3

I wouldn’t take the 401k loan because of the tax implications when you file next year. I’d take what you were paying on the two smaller cards and add it to the 134$ along with any extra money you can swing. If you still have a balance at tax time, pay it off then.  

Comments

@leyba I have had loans out on my 401k the last 2 years to pay off my car and it hasn’t effected my tax returns that I’m aware of. My tax person never mentioned it, but did say I was getting more due to the fact that I am contributing to a 401k.  

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@leyba there def is tax implications. make sure your tax advisor knows you took the loan out because it could be big

Answer 4

First I would NOT take a 401k loan because you will pay way more than the 24% interest especially if you lost your job. So, let’s say your tax bracket is 22%, you’d pay the 22% & you lose your job then you will pay 20% penalty (if you can’t pay what you borrowed back in full) so in total you pay 44% trying to get away from a $7k credit card debt. And return for all your maneuvers Your retirement gets totally screwed. Oh, BTW, I’d close the credit card because a credit card is never a good idea “in case of an emergency”.