401(k) to Pay Off Debt

Thinking about using your 401K to pay off debt?

There are a few situations where paying off debt with your 401k may make some sense.

Layoffs or hardship situations like significant medical expenses, purchasing a home to prevent foreclosure or eviction or necessary home repairs MAY qualify. And, other debt is sometimes considered an eligible hardship.

Keep in mind that early withdrawals are subject to income tax plus a 10% penalty. And, the amount could put you into a higher tax bracket.

If you have a loan with an interest rate above 18%, borrowing might make sense. But calculate your interest costs versus your tax penalties and have a knowledgeable person run the numbers before you decide. 

There are better ways to reduce debt!

Negotiate your rate and term with your credit card company. Good credit could get your rate dropped by several percentage points.

Use the snowball or avalanche methods to pay off debt faster and reduce the total interest you’re paying.

Transfer your balance to a lower interest credit card. Just make sure you know ALL the terms before doing that to avoid future problems.

A 401k account is retirement money that you should avoid using if at all possible. If you withdraw money once, you’ll be tempted to do it again. So, pray for guidance!

Jesus says: If any of you lacks wisdom, you should ask God, who gives generously to all without finding fault, and it will be given to you. (James 1:5) 

For encouragement in your financial journey go to Crown.org.

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