How consolidating credit card debts with 401k works?

I have enough in my 401k and i need to consolidate credit card debts which would require all of it after taxes and penalties, but could to pay off all the credit cards! Which is better route, refinancing or 401K debt consolidation loan?|||Generally, to consolidate your credit card debt one can only borrow about half of their vested 401k in total of their 401k loans. Obviously if your account balance grows you can take more loans. Some companies require that you only have one or two outstanding loans at a time so they don鈥檛 have to manage too many payments.





When you borrow you typically pay a small fee for administration or some agencies also do free counseling . After that your payments plus interest come directly from your paycheck and into your retirement account including the interest payments. I would suggest you to go for Counseling and then Debt Consolidation|||There may be some limitations on your options with regards to your 401(k). However, what you could do is take out a loan from your 401(k) balance. Standard guidlines (but not necesarrily your plan) are the loan has to be at least $1,000, it cannot be more than 50% of the total value of the 401(k) balance (except for certain situations) and it cannot be more than $50,000





When you get the money from the loan, you can pay-off your credit cards. You then begin repaying the loan over a period of 5 years or less via automatic payroll deductions. You pay a reasonable interest rate for the loan (around 8% currently). You may also pay some initial admin fee and then a service fee each year (very small) to the 401(k) administrator.





Because you have essentially loaning yourself money, the interest on the loan is paid to you.





However, there are some significant pitfalls to be aware of.





1. If you don't change the spending behavior that got you into debt in the first place, you may find yourself in the same position in few years. Only this time you will also be paying back your 401(k) loan and you may not have the option of taking another one.





2. The money you loan yourself reduces your 401(k) balance. This means that money (and associated tax benefit) is not available to grow and compound in your account as it normally would. This will potentially reduce your retirement balance significantly, years from now.





3. When you pay your loan back, you are paying it back with after-tax funds. So you have not only lost the benefit of the pre-tax growth, you are paying it back after-tax, so you lose the initial pre-tax benefit also.





4. If your employment terminates, the loan will have to be repaid within 60 days to avoid taxes and penalties. If the loan is not repaid, the outstanding balance is considered a disbursement and you will be owe federal and state taxes on the amount and an additional 10% penalty (unless you 59.5 years or older)|||In a 401k loan, you actually borrow money from yourself. Most plans have a modest interest rate, and there is no 10% federal penalty for doing this. The question you will have to ask yourself is, has your 401k recovered enough so that taking the funds "out of market play" so to speak, won't affect you more than just paying off the cards down the road? You have a good idea there, but it's all about discipline too. Don't pay off the cards, with one loan, and go out and use them again later only to be in a spot where you are stuck. Refinancing? I don't think you are going to get a bank to play along with that idea for carry one debt for all your unsecured debt, which is what credit card debt is.|||You will have to prove hardship to your HR person in order to get a loan or to take money out of your 401K.


Make an appointment and have all your bills ready.


I suggest a loan, that way you will pay back yourself with interest.


Also, with a loan you won't be hit with that 10% penalty + taxes, which can easily eat up 40% of the money you take out.


Note: When withdrawing the money, you may get all the 401K money.


You'll have to pay the taxes on your own come next April - so hang on to a large chunk of your withdrawl,


/|||Personal debt is not a qualifier for a hardship withdrawal. All 401k plans must follow the IRS' rules and only certain criteria apply.





Some 401k plans offer personal loans, but you're shooting yourself in the foot to take that option. First, you're going to have to figure in at least 30% of that figure to go to taxes immediately...10% penalty for early withdrawal if you are under 59, then the other 20% to prevent from having to pay income taxes on it next year. In addition, the reduced amount of your 401k means a reduced return on your investment.





More here: http://moneycentral.msn.com/articles/ret鈥?/a>|||In my opinion, using 401K money, or any retirement money, to pay off credit card debt is the worst thing that you can do, Followed by borrowing against your house. Retirement funds are protected against creditors so why would you put your retirement at risk? Cut down on your spending and pay off your debt asap,