If you’re wondering whether using your 401(k) to pay off debt is good for you, it depends. You could use your 401(k) to pay off student loan or credit card debt more quickly, but you’re reducing retirement savings while potentially paying penalties. There’s also a chance your 401(k) plan may not even allow the withdrawal.
You need to consider the pros and cons of using your retirement funds to pay off debt. As you think about what’s best for you, remember that an advantage now could be a disadvantage later in life. Our pros and cons generally focus on your current situation.
|● You could stop adding to your credit card debt.|
● You limit your current expenses.
● You get the money now.
● You may not have to pay as much income tax in retirement.
|● You could owe a 10% penalty.|
● You may start a trend of using your retirement savings as a bank account.
● You could pay income taxes now.
● You could instead transfer your credit card debt to a low-interest or no-interest introductory credit card offer if you have good credit and qualify.
● You’ll lose the power of compounding interest.
- You could stop adding to your credit card debt. As of February 2020, the average APR on current credit card accounts that accrue interest is 16.88%, according to CompareCards. By taking money from your 401(k), you limit interest charges on your credit card as long as you stop swiping it regularly.
- You limit your current expenses. When you no longer have to make credit card or student loan payments, your expenses shrink. Withdrawing from your 401(k) to pay off debt could allow you to manage your budget better.
- You get the money now. Some people may not be as worried about how much they’ll receive in retirement if they’re going through an urgent financial situation now.
- You may not have to pay as much income tax in retirement. Your 401(k) contributions are made pre-tax, so you must pay income taxes when you withdraw. If you withdraw early, you could owe less taxes come retirement.
- You could owe a 10% penalty. If you’re withdrawing from your 401(k) before your plan’s normal retirement age or you don’t qualify for a hardship distribution, you’ll likely owe an additional 10% on top of what you need.
- You may start a trend of using your retirement savings as a bank account. Even if paying off debt with your retirement account makes sense now, it starts a slippery slope of withdrawing funds instead of potentially fixing budget issues. The result would be declining retirement savings.
- You could pay income taxes now. Your tax rate is generally higher during your working years. If you don’t absolutely need the money, you’re likely better off avoiding 401(k) withdrawals to pay off debt.
- You could instead transfer your credit card debt to a low-interest or no-interest introductory credit card offer if you have good credit and qualify. Ask your issuer about a lower rate or look for introductory balance transfer offers. Introductory offers on these types of cards could extend up to 21 months.
- You’ll lose the power of compounding interest. One of the purposes of investing long term is that your money and the interest you’ve earned both earn interest. Taking out money from your retirement reduces this power.
The first part of cashing out your 401(k) to pay off debt is figuring out how much you have available to withdraw, said Jason Washo, a certified public accountant with Washo Financial in Scottsdale, Ariz. The answer depends on the rules of your 401(k) plan.
For instance, one plan may allow only withdrawals of the money you contributed, while another may allow you to withdraw earnings, Washo said.
No matter which funds your plan allows you to withdraw, there are additional rules. General circumstances where you won’t pay penalties on early withdrawals include, according to Washo:
- Medical expenses from the same year that are more than 10% of the individual’s adjusted gross income
- Levies initiated by the IRS
- Thoroughly documented disabilities that are permanent or life-threatening
- Divorce orders
- Adoptions or birth
For adoption or the birth of a child, the withdrawal limit is $5,000 before the 10% penalty applies.
If you’re withdrawing from your 401(k) to pay off debt, you may qualify for a hardship distribution. To do so, the IRS states you need to be in “immediate and heavy financial need.” The exact level of financial difficulty can vary among employers and 401(k) plans. If approved, you still have to pay the 10% early withdrawal penalty, plus income taxes.
Other circumstances for withdrawing funds from your 401(k) with the 10% penalty plus income taxes can include, according to Washo:
- Medical care expenses
- Homebuying costs on primary residence
- Expenses related to higher education, including tuition and room and board
- Payments to avoid eviction
- Home repair costs
- Funeral expenses
For hardship distribution withdrawals, the limit is based on the amount of the expense.
How long does it take to cash out your 401(k)?
“The exact amount of time depends on the individual plan and whether the request is a bank transfer or a check,” Washo said. “Some investments may have minimum holding period requirements, but this would probably be a rare and limited circumstance.”
Getting a 401(k) loan to pay off debt doesn’t require the same approval or have the same penalties as withdrawing funds.
|● You replenish your 401(k) through interest charges.|
● You have up to 5 years to repay the loan.
● You won’t pay penalties for early withdrawal.
● You have fewer restrictions when using a 401(k) loan to pay debt than cashing out your 401(k).
|● You move debt rather than delete it.|
● You may have to pay yourself back faster than with other loans.
● You have to come up with money to repay the debt that you may not have.
● You may owe origination and processing fees.
- You replenish your 401(k) through interest charges. Your 401(k) loan payments are designed to recharge your 401(k). You pay interest to lessen the impact of your loan on your retirement savings. You also aren’t subjected to a credit check since you are borrowing from yourself.
- You have up to five years to repay the loan. This is years longer than you could receive through an introductory balance transfer offer (60 months versus up to 21 months). The exception is if you’re borrowing from your 401(k).
- You won’t pay penalties for early withdrawal. 401(k) loans are a tax-free withdrawal option.
- You have fewer restrictions when using a 401(k) loan to pay debt than cashing out your 401(k). You can take out a loan on up to 50% of vested retirement savings or $50,000, whichever is less.
- You move debt rather than delete it. Often, working on a plan to pay off debt is smarter, such as by reducing your budget to allow more room for payments, negotiating lower payments or interest rates with your credit card company or getting a forbearance on your federal student loans.
- You may have to pay yourself back faster than with other loans. Student loans or mortgages may give you up to 30 years to repay debt.
- You have to come up with money to repay the debt that you may not have. Pay close attention to payment amounts first. You may be better off working with a consolidation company if you can’t afford debt payments.
- You may owe origination and processing fees. For example, the New York City Deferred Compensation Plan’s 401(k) loan program charges a $50 origination fee and quarterly maintenance fee of $8.75.
Student loan debt
If you’re thinking about withdrawing or borrowing from your 401(k) to pay off student loans, you need to carefully analyze various factors.
- You lose federal student loan protections. Income-driven repayment options can allow you to qualify for a monthly payment of as low as $0.
- You give up the potential for student loan forgiveness. If you were working toward qualifying for Public Service Loan Forgiveness — 10 years of on-time payments with a public service employer — you’d lose this option if you paid off your student loans with your 401(k) plan.
- You may qualify for a student loan interest deduction. If you continue paying your student loans as normal, you may be able to deduct interest you paid during the year.
- You may solve affordability issues. If you’re having trouble making payments because your variable interest rate rose on a private student loan, a 401(k) withdrawal or a 401(k) loan with a lower interest interest rate may give you a boost.
- You generally can’t discharge students loans in bankruptcy. You would be required to prove your federal or private student loans are causing extreme undue hardship, which is almost impossible to do.
You may decide that you want to pay off your student loans with your retirement plan because you didn’t qualify to refinance your student loans to get a lower interest rate.
Credit card debt
Withdrawing from your 401(k) or using a 401(k) to pay off credit card debt is a completely different decision than whether to use your retirement plan funds to pay off student loans since credit card debt can continuously grow.
According to a 2019 study from Merrill Lynch, 25% of adults ages 18 to 34 have already made a 401(k) withdrawal, with the top reason being to pay credit card debt.
- Borrowing from your 401(k): You’ll have to repay the money in five years. The new payment could be much higher than a credit card minimum payment, but it could be at a lower interest rate.
- Withdrawing from your 401(k): This could be a good option in extreme financial circumstances, though it often involves a 10% penalty on top of income taxes.
No matter which route you choose, you could boost your credit score by diligently paying your credit cards on time and lowering credit card balances.
Michelle Argento contributed to this report.
Interested in refinancing student loans?Here are the top 9 lenders of 2021!
|Lender||Variable APR||Eligible Degrees|
|1.89% – 6.15%1||Undergrad & Graduate|
|1.99% – 5.64%2||Undergrad & Graduate|
|3.80% – 9.36%3||Undergrad & Graduate|
|1.91% – 5.25%4||Undergrad & Graduate|
|2.25% – 6.53%5||Undergrad & Graduate|
|2.15% – 4.42%6||Undergrad & Graduate|
|1.89% – 5.90%7||Undergrad & Graduate|
|2.39% – 6.01%||Undergrad |
|2.00% – 5.63%8||Undergrad & Graduate|
|Check out the testimonials and our in-depth reviews! |
1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of May 1, 2021.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of October 26, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 10/26/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
3 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Jan 1, 2021 and may increase after consummation.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 02/17/2021 student loan refinancing rates range from 1.91% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.
5 Important Disclosures for SoFi.
6 Important Disclosures for PenFed.
Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.15%-4.42% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
7 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of April 29, 2021. Information and rates are subject to change without notice.
8 Important Disclosures for Nelnet.
Checking your rate results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score.
Interest rate reduction of .25% for automatically withdrawn payments from any designated bank account (“auto debit discount”). Auto debit discount applies when full payments (including both principal and interest) are automatically drafted from a bank account. The auto debit discount will continue to apply during periods of approved forbearance or deferment if the auto debit discount was in effect at the time of receiving the forbearance or deferment. Auto debit discount will remain on the account unless (1) the automatic deduction of payments is canceled or (2) there are three consecutive automatic deductions returned for insufficient funds at any time during the term of the loan.
Request for the cosigner to be released can be made by the borrower after 24 consecutive, on-time payments (not later than 15 days after the due date) of principal and interest have been made. Borrowers in deferment or forbearance must make 24 consecutive, on-time payments after re-entering repayment to qualify for the release. The borrower must be current on their payments at the time of the cosigner release request and show the ability to assume full responsibility of the loan(s) by meeting certain credit criteria on their own at the time of the request, including, but not limited to, being a U.S. citizen or having permanent residency in the United States, being the age of majority in their permanent state of residency, providing sufficient proof of income, and having no student loans in default.
Hardship forbearance allows you to temporarily suspend payments on your loan(s) while you are experiencing financial hardship. It is offered in increments of two or three months, with a maximum of 12 months available, in aggregate, over the life of the loan. If your loan(s) are in good standing at the time of your request, you will be eligible for forbearance in increments of two monthly payments. If, at the time of your initial request, your loan(s) are considered past-due, you will be eligible for forbearance in increments of three monthly payments. Future increments of forbearance, up to a life-time maximum of 12 months, may be requested upon the completion of making a certain number of principal and interest payments. During the two- or three-month forbearance period, you will not be required to make payments; however, any unpaid interest will continue to accrue and will be capitalized (added) onto your principal balance at the end of the forbearance period. You may continue making payments in any amount without penalty during the forbearance period. Your loan repayment term will be extended by the number of months in the forbearance period.
Refinance Loan Eligibility: You must be a U.S. citizen or permanent resident alien with a valid U.S. Social Security number, and be the legal age to enter into binding contracts in your permanent state/territory of residency, or be at least 17 years of age and apply with a cosigner who is at least the age of majority in their state/territory. Non-residents can apply with an eligible cosigner who is a U.S. citizen or permanent resident alien with a valid U.S. Social Security number. The student loans you refinance must be in their grace or repayment period, and you can no longer be enrolled in school on a half-time or more basis. You must have at least $5,000 in student loans to refinance. You, or your eligible cosigner, must have an annual income of at least $36,000. Approval subject to credit review. Other credit criteria may apply.
Refinance Loan Limits:
Loan Refinancing Risks: Federal student loans include benefits that may not be offered with private student loans. Carefully review any potential benefits that may be lost by refinancing federal and private education loans, such as the loss of any remaining grace periods. To learn more about what to take into consideration when refinancing federal student loans with private education loans, click here
Selecting ‘Get Started’ results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score.
Fixed interest rates range from 2.99% APR (with auto debit discount) to 6.25% APR (without auto debit discount). Your interest rate will depend on your (and if applicable, your cosigner’s) credit qualifications. The fixed interest rate will remain the same for the life of the loan.
Variable interest rates range from 2.00% APR (with auto debit discount) to 5.63% APR (without auto debit discount). Your interest rate will depend on your (and if applicable, your cosigner’s) credit qualifications. Variable rates may increase after consummation. The variable interest rate is equal to the One-Month London Interbank Offered Rate (“One-Month LIBOR”) plus a margin. The One-Month LIBOR in effect for each monthly period (from the first day of the month through and including the last day of the same month) will be the highest One-Month LIBOR published in The Wall Street Journal “Money Rates” table on the twenty-fifth (25th) day (or if such day is not a business day, the next business day thereafter) of the month immediately preceding such calendar month. The Annual Percentage Rate (APR) for a variable interest rate loan will change monthly on the first day of each month if the One-Month LIBOR index changes. This may result in higher monthly payments. The current One-Month LIBOR index is 0.15% as of 5/4/2021.
The lowest interest rate for each loan type requires automatically withdrawn (“auto debit”) payments, a five-year repayment term, and the borrower making immediate principal and interest payments. Not all borrowers will receive the lowest rate. The interest rate and Annual Percentage Rate (APR) may be higher depending upon (1) the credit history of the borrower and, if applicable, the cosigner, (2) the repayment option and loan term selected, (3) the loan type selected, and (4) the highest level of education attained. If approved, applicants will be notified of the rate qualified for within the stated range.
*Checking your rate results in a soft credit pull, which will not affect your credit score. If you continue with your application, Nelnet Bank will request your permission to obtain your full credit report from one or more consumer reporting agencies. This is a hard credit pull and may affect your credit score. **Your actual savings may vary based on interest rates, outstanding balances, remaining repayment terms, and other factors.