Contributing to a 401K is a great way to plan for your financial future. In a perfect world, the money you put into your 401K wouldn’t be needed before retirement, but there are some life situations that may make you think about pulling money out of your retirement funds.
Before you go through with withdrawing funds from your 401K, there are some questions to consider, including:
- What happens to my credit when I pull money from my 401K?
- What are some legitimate reasons to pull money from my 401K?
- Should I pay credit card debt from my 401K?
Pulling money from your 401K has no impact on your credit score, but that’s not the only thing to consider. There are pros and cons of withdrawing money from your 401K.
Reasons to Pull Money from Your 401K
When you set aside money for retirement, the last thing you expect is to need to use it before you retire. There are some legitimate hardship reasons to take a 401K loan or withdrawal. These include:
- Purchasing a primary residence
- Funeral or burial expenses
- Medical expenses
- Tuition or other costs related to education
- Preventing foreclosure or eviction from your home
- Repairing damage to your home caused by a natural disaster
- Total and permanent disability
Withdrawing money from your 401K can save you when you’re faced with stressful situations like these, but there are consequences. If you take money from your 401K before the age of 59½, you’ll have to pay taxes and an early withdrawal penalty.
Can I Use My 401K to Pay Credit Card Debt?
Credit card debt can be overwhelming, and it can be tempting to dip into your 401K to pay it off. Credit card debt doesn’t usually qualify as a hardship, but you may be able to take a loan against your 401K. Depending on what your employer lets you do, you may be able to borrow up to half of your 401K savings. In most cases, you’ll have to pay it back within five years, but the interest rate is usually much lower than you’re paying on credit cards.
Borrowing against retirement funds may help you pay back debt faster because you’ll pay fewer interest charges. No credit check is required, and this type of loan doesn’t show on your credit report, even if you default on payments. You won’t be able to contribute to your 401K while you’re repaying a loan.
Keep in mind that if you leave your job, you’ll have to pay the loan back in full in a short amount of time and this could also cause you to owe a tax penalty. You may end up with a bigger financial hole than you started with.
Understanding Your Options
Most financial experts caution against using retirement funds to pay off debt. If you’re having financial difficulty, it’s a good idea to explore all of your options for a solution before touching your retirement money. Consider a personal loan or a credit card with 0% interest for a period of time to consolidate debt or deal with unexpected emergencies.
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