How to Take Money Out of a 401(k) to Pay Off Credit Cards

Because the sole purpose of a 401(k) plan is to encourage people to save for retirement, there are substantial penalties for taking money out before you reach the withdrawal age, which is 59 1/2. Money you take out early is subject to income taxes, plus a 10 percent penalty -- and that's if your plan even allows early withdrawals, which many do not. There's an alternative, however: borrowing money from your 401(k). Though it has its own costs, a loan isn't subject to taxes or penalties, so it is the best way to take money out of a 401(k) to pay off credit cards.

Instructions

1

Contact your plan administrator. Many employers hire an outside benefits firm to handle their 401(k). If you're not sure whom to contact, ask your company's human resources or benefits office.

2

Determine a loan amount and repayment schedule. Most plans allow you to borrow up to 50 percent of your vested balance at a low interest rate. You get up to 60 months to pay it back; those payments will be deducted from your paycheck. (References 1 .and 2)

3

Discuss any restrictions. You should be able to continue contributing to your 401(k) while the loan is outstanding, but ask to make sure.

4

Sign for the loan. Since the money you're going to be borrowing is your own, you don't have to apply for the loan or undergo a credit check. If your plan allows loans, as most plans do, then you automatically qualify. You also won't have to supply a reason for the loan. Again, it's your money, and as 401kHelpCenter.com notes, employers generally don't want to know too much about workers' private lives anyway. (Reference 3.)

5

Repay the loan. Because this is done through payroll deduction, you don't have to worry about missing payments or paying late.