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Can You Withdraw 401(k) Retirement Money to Pay Off Credit Cards?
Outstanding credit card debt can quickly leave you in a desperate position, Threatening letters and persistent calls from debt collectors quickly wear down many consumers who decide to dip into their 401(k) retirement funds early rather then endure the weight of their unpaid credit card debt on their shoulders any longer. Unfortunately, just because you want to access your 401(k) retirement funds early, there is no guarantee that your employer will grant you the privilege
Hardship Guidelines for Early 401(k) Withdrawals
If you choose to withdraw money from your 401(k) early just to pay off your steadily increasing credit card debts, you’re likely to face a brick wall when you make the attempt. That’s because, even if your employer wanted to give you access to your retirement money, employers are limited by federal laws regulating who is and is not eligible to cash out their retirement investments before retirement.
In general, you can use a “hardship” excuse to access your money early in the following situations:
- If you’re buying a home. You can put money you withdrew from your 401(k) into the purchase of your first home as a down payment or closing costs. If you plan to use the money for another purpose that is directly related to your new mortgage acquisition, ask your 401(k) administrator before doing so.
- Medical expenses. Only your medical expenses and those of your spouse and children qualify.
- To repair damage to your home. In most cases, the damage must be significant enough to render the property uninhabitable.
- As college tuition for you, your spouse or your children
- To prevent foreclosure of your primary residence. In otherwords, you can’t get a 401(k) early withdrawal if the bank is closing in on rental or vacation property you own.
No Provisions Exist to Cash Out a 401(k) for Credit Card Debt
As you can see, the rules regarding what you can and cannot access your 401(k) funds early for do not include liquidating retirement assets merely to pay off overdue credit card debt. If the overdue credit card debt results in the credit card company sending your account to a collection agency which subsequently sues you, places a lien on your home and then uses the judgment lien to initiate foreclosure, THEN you would be able to withdraw your retirement money early.
A 401(k) Loan May Be the Answer
While you can’t claim an early withdrawal to access the money stored away in your 401(k), you can borrow against it – provided you haven’t yet reached your borrowing limit. Interest rates on 401(k) loans are typically low. Remember, however, that low interest isn’t necessarily a good thing, since you’re paying the interest back to yourself rather than a traditional lender. This could cost you more in the long run.
Ultimately, taking the time to calculate how much money you’d lose in retirement by taking a 401(k) loan rather than an early withdrawal should tell you if it’s a wiser financial decision to just pay off your credit card bills with the loan money or let the credit card company do its worst. Regardless of which decision you make, make sure to pay the credit card company rather than a collection agency. Paying collection agencies rarely does anyone any good, and it doesn’t improve your credit score!