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Should I Take Out a 401(k) Loan to Pay Off Debt?

Apr 03, 2014

Q: I have $7,300 in high-interest debt. Should I take out a 401(k) loan to pay it off? -- Joanne, Columbus, Ga.

A: Only if you can keep saving for retirement. Yes, a 401(k) loan looks like a good deal initially since the interest you pay (now about 4% to 5%) goes into your account.

One danger, though, is that you just rack up more debt.

"Moving money around is not becoming debt-free," says Gail Cunningham, a vice president of the National Foundation for Credit Counseling.

And if you make 401(k) loan payments in lieu of contributions, the tab can be steep.

Not only do you miss out on potential returns, but you also forgo an employer match, says Vienna, Va., financial planner Michael J. Rebibo.

Plus, saving less in your 401(k) means a higher income tax bill.

And if you quit or get laid off and can't repay the loan within 60 days, you'll owe a 10% early-withdrawal penalty (assuming you're under 59½) as well as taxes.

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