Credit cards are getting me down. The winter cold has caused my utility bills to skyrocket. I seem to be falling farther behind each month in paying my bills.
Sitting and waiting for me to retire is my 401(k) plan. Maybe I should think about paying my bills with it. After all, the money is just sitting there, not doing anything. I mean, it’s almost free!
Wait! Before you do that, look at all of the options. Let’s discuss some of the ramifications.
The good: By paying out this money, you will get rid of some, or all, of your debt. By definition, it is good to get rid of debt, so this seems to make sense. But what are the costs here?
If you are not going to pay off the 401(k) withdrawal, you will have tax ramifications in the nature of a 10% penalty. In addition, you will pay income taxes on the amount you borrowed. Further, if you have “settled” your debt, you will pay additional income taxes on the amount of money that you saved by settling. So calculate all of these amounts, and see how much you really saved.
If you are going to make payments on a 401(k) loan, review the amount of your monthly payment and see if you can handle it. Look into the security of your job, because if you would be laid off or otherwise terminated, you will face all of the problems noted above. And finally, do you really want to mess with your retirement plan?
In our experience, we have found that unless you have enough in your 401(k) account to pay off your debt, it is best not to take the money out of the retirement account. Using funds from your 401(k) just to get caught up with payments will only delay the inevitable. You will fall behind again, and your retirement account will be depleted.
You may have other options. You may be eligible for a Chapter 13 reorganization that pays down your unsecured debt over five years in part or in full, usually at no interest. If the debt is paid off in part but you successfully complete the Plan, the remainder of the unsecured debt (with very few exceptions) is completely discharged.
Or you may be eligible to do a Chapter 7 bankruptcy and get all of the unsecured debt discharged.
There are no tax ramifications for either of the options above, and you get to keep your pension intact.
So before you make a decision of this importance, get some good advice. Maybe the advice will come from us at Steidl and Steinberg. It is free, after all.