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I have about $20,000 in credit card debt. Some of this is at a very high interest rate. I have the option of taking a loan on my 401(k) savings to get rid of all the debt but want to know the consequences and what my options are.
Frequently, borrowing against your 401(k) is a powerful way to lower the effective rate that you are paying on unsecured debt. I will discuss more about 401(k) withdrawal rules in just a moment.
If the interest rate on your credit card debt is higher than the interest rate on your 401(k) loan (which is almost always the situation), then a 401(k) loan will likely be a good solution for you. The benefits are less money going to cover interest fees and possibly a lower monthly payment. Ideally, you would use the extra cash flow to pay down the total debt amount faster, getting debt free in a shorter amount of time. Be sure not to "run up" your credit cards once they are paid off!
You will want to be careful not to cash out your 401(k) savings (called "receiving a distribution" by the IRS), however, and simply borrow against your savings. If you liquidate, or sell assets from, a 401(k) before eligible retirement drawdown begins — you may face very steep tax liabilities.