What you need to know about 401k withdrawal to pay of debt

The economy has led many homeowners to look for ways to help pay for the mounting debt they face, higher mortgage payments, higher gas prices, increased utility bills and the high interest rate on credit cards have left many desperate to find ways to get more money or get loans to help pay off these incurring debt and bills.

Retirement and personal finance

Most companies have retirement funds and employees have a percentage of their paychecks saved in a contribution retirement plan which is tax deferred until withdrawal of funds.

Saving for retirement during ones working years is a personal finance plan so that one can live a more enjoyable future once old age becomes a factor. Preparation for retirement is something that starts years in advance. The money that is deferred into these retirement accounts is then invested into mutual funds, savings bonds, money market and stocks. If investments do well, there will be more in the account at retirement; if investments do poorly, there will be less.

Withdrawal Penalty and what it means

Money that is withdrawn prior to the age of 59½ typically incurs a 10% penalty tax unless a further exception applies. This would be in addition to any income tax due on income incurred during this time.

Exceptions:

• The employee's death,
• the employee's total permanent disability,
• separation from service in or after the year the employee reached age 55

Is it better to take a loan from your 401k plan?

It is possible to take a loan from your 401k , this loan will have to ber repaid along with any incurring interest.This loan is not considered taxable income nor is it subject to the 10% penalty. Terms and conditions include:

• Loan be paid back within 5 years
• With a reasonable interest rate
• Payments made each quarter over the course of the loan

If payment on the loan is not made it becomes a defaulted loan, accrued interest on the loan balance,may end up becoming a taxable distribution with all the same tax penalties and implications of a withdrawal.

Are 401K plan loans tax-disadvantaged?

401k plan loans are not tax-disadvantaged due to the fact that the loan is repaid with after-tax dollars, but the loan itself is not a taxable event, so the "income" from the loan is tax-free. Such loans as a mortgage or home equity line of credit has tax advantages simply due to the interest on the loans is deductible. Where as the 401k loan uses the tax-deferred feature.

In Conclusion:

When it comes to ones future and financial state, using funds today to cover bills and debt can put a strain on the future when retirement comes and less income is made to live on. Proper planning now will help with those challenges ones will face in the coming years. Consider what the economy will be then when society is living longer and healthier lives. Make sure your finances will be healthy as well.

Investigate all options, in order to make the best decisions when it come to withdrawal of funds from your IRA to pay of debt and credit cards. Look for ways to save money, increase income and budget for retirement.