IRS rules are pretty strict about when you are allowed to withdraw money from your retirement plan. If you do it before you reach 59½, you usually have to pay a 10 percent early withdrawal penalty plus income tax on the distribution. But what if you really need that retirement nest egg to pay off credit card debt or put a down payment on a home? If you have a 401(k), you can actually lend the money back to yourself.
Yup, most 401(k) plans allow you to loan yourself up to half the total value of your savings up to $50,000 (but not the SIMPLE and the SEP IRA) [source: IRS]. Interest rates vary, but they are typically much lower than a traditional bank loan and they are many times lower than the rate on your credit card debt [source: Wall Street Journal]. In some cases, it makes very good sense to borrow from your 401(k) to pay off high-interest debt. Use this calculator to figure out what it will cost to pay back a 401(k) loan and compare it to the interest payments on your credit card balance.
401(k) loans have their own rules. They must be paid back in five years, unless the money is used to buy a primary residence for the borrower. Otherwise, you can use the loan for whatever you want, as long as you pay up on time. If you default, the loan will be treated as an early withdrawal, triggering the 10 percent penalty and income taxes [source: IRS]. Conventional wisdom says to borrow only as much as you need, not as much as you can get [source: Wall Street Journal].
Finance Planning Tips
Here are some tips to help you with generating income and planning for the future.
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