Should I Borrow Against My Retirement to Consolidate My Debt?

If you feel like you're drowning in debt, you may have considered borrowing against your 401(k) retirement plan. This loan option has both advantages and disadvantages. Make sure that you. ve considered all the possibilities before you make a decision.

There are several advantages to borrowing against your retirement plan. Interest rates for this type of loan are relatively low compared to traditional loans. This is because they are secured, meaning you're borrowing against money that's already in the bank.

Because you're borrowing from yourself, any interest that you pay goes back into your retirement plan. Companies also make it pretty easy to borrow from retirement accounts.

By Federal law, you can borrow up to half of your retirement savings or $50,000 - whichever number is smaller. You. ll typically have 5 years to pay back your loan. So, if you want to borrow a fairly small sum of money that you can afford to pay back in 5 years, this may be a good route for you.

There are some drawbacks to this type of loan, however. First of all, you'll be double taxed. You use after tax income to pay back your retirement loan and then you'll be taxed again on that amount after you retire.

You may also find it difficult to keep making your regular contributions to your retirement while repaying a large loan. Five years is not very long to pay back a large sum of money. You could end up having less for retirement than you originally planned.

Finally, if you leave your job, you'll probably have to repay your loan immediately to keep your full retirement. If you're unable to repay the loan on time, you may be subjected to a penalty of 10% of the amount you owe, plus any income taxes on that amount.

A retirement loan may seem like a quick fix to a big problem of too much credit card debt. However, think seriously about the possible consequences. If you're unable to pay back your loan, that could mean a leaner income in your retirement years.

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About the author:

Michael Torrance is a financial consultant with First American Debt Consolidation and Loans, a company specializing in debt consolidation loan alternatives through consumer credit counseling.