Is It Smart To Use My 401k To Pay Off Debt?

If you find yourself drowning in debt, using your 401k to pay off debt may seem like a viable option.

What Is A 401k?

Traditionally, a 401k is an employer-sponsored retirement plan made available to employees. It is a tax-advantaged plan that is geared to help you save money for retirement.

What Does “Tax Advantaged” Mean?

Tax-advantaged means the fund is subjected to different tax rules that generally are geared in favor of the investor.

How A Tax-Deferred 401k Works 

A traditional 401k defers taxes until you draw money out of the account. In simple terms, your employer will take money from your paycheck and invest it in your traditional 401k before any taxes are paid to the government. 

How A Tax Exempt 401k Works

A tax-exempt 401k is referred to as a Roth 401k. While not “truly exempt” from all taxes, a Roth pays taxes upfront, but nothing on the gains or withdrawals. When you invest money in a Roth, you invest after-tax money in this account.

Reasons People Borrow From Their 401k 

- Using your 401k to pay off credit card debt - Using your 401k to pay off student loans - Using your 401k to purchase a car - Borrowing from your 401k to pay off your mortgage or buy a house

Can I Cash Out My 401k While Still Employed?

If your 401k plan is sponsored by your current employer, you can not access this money until you leave employment or suffer a major hardship. If you have an old 401k plan from a previous employer, you can cash this out or take the cash back from it – but you may be subject to an early withdrawal penalty.

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