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One all too common form of debt reduction being
used today is borrowing against a 401(k). Sure,
by consolidating your credit card debt with a
loan against your 401(k) you’ll be able to
reduce your interest rates, but in many cases,
it is still far from a savvy financial or
personal decision. Here’s why (keep in mind that
the following is not to be considered financial
advice. For financial advice speak to a licensed
professional): 1. You lose tax-free,
compounding interest dollars on the amount you
borrow. The potential gains one can realize when
the money is left alone to accumulate interest
without being taxed are oftentimes significant.
The average $10,000 deposit in a 401(k) grows to
over $14,000 after just 5 years, assuming you
realize 8% gains annually, which is very
realistic. If you allow the interest to
accumulate for longer, the real and percentage
gains are even more substantial.
2. If you are fired or offered a better
position elsewhere, you will most likely be
required to pay the full loan balance
immediately. If this isn’t possible, you will be
stuck with high fees and tax obligations, even
further diminishing your potential gains.
3. There are a myriad of debt reduction
options available for you to take advantage of
instead. In light of the two aforementioned
downsides of borrowing against a 401(k), this is
extremely important to remember. After all,
borrowing against a 401(k) would make a lot of
sense if you had a lot of high interest credit
card debt and it was the only debt relief
solution available. With other options for debt
reduction available, however, it is logical to
explore your other alternatives. |
