How to Use 401(k) to Get Completely out of Debt

A 401(k) plan is a retirement account set up by many employers for their employees. In many cases, these 401(k) plans allow employees to contribute a percentage of their pre-tax income, ultimately resulting in more money for retirement. Often, employers will match contributions up to a certain percentage (usually no more than 3%). Most 401(k) plans allow employees to draw from their balances for expenses.

Instructions

401(k) Loans

1

Examine your most recent statement. Most 401(k) plans do not allow employees to borrow more than 50% of the balance in the account.

2

Review your credit card and other debt statements. Add up all the balances (get payoff balances directly from the creditor) and determine whether half of your 401(k) will cover your total outstanding debt.

3

Determine how much cash you will get if you liquidate your 401(k). Do this only if half of your account cannot cover the outstanding debt. Also, think carefully before liquidating an account--you'll be charged immense taxes and fees to do so.

4

Review the terms of 401(k) loans for your company. In most cases, the origination fees are quite low (or nonexistent), the interest rates are competitive, and they are closed-end (like mortgages and car loans). Also, make sure you can borrow 50% of the balance.

5

Access your 401(k) account online. It is best to do this from a personal computer as you will be entering personal information. Apply for the loan on the company's website.

6

Wait for the approval. This shouldn't take more than a few days. A credit check is not required since it is all your money.

7

Use the proceeds of the account to pay off your debts. It is best to set up 401(k) loan payments directly through your paycheck. This way you'll never miss a payment and will quickly build back the balance of your retirement.