A warning about credit card debt relief options was the focus of our prior post. It wasn’t a warning against finding a solution, but instead it warned about jumping into a decision before truly understand the benefits and consequences associated with that decision and other options. We used withdrawing from 401(k) as an example, the first post focusing on the current costs associated with this option.
In our prior post, we determined that an individual in the 25 percent tax bracket could have to withdraw approximately $15,000 from a 401(k) to pay off a $10,000 credit card debt. However, this is only a present-day snapshot. Looking down the road, that money may actually cost $60,000. How?
The money in a 401(k) continues to earn interest. For a person who would have left it there for another 14 years, the average 5 percent interest rate would have increased the future value to that $60,000 mentioned above. Again, for some there may be sufficient funds there to make this a viable option.
Borrowing from a 401(k) is another option that helps avoid the tax issue, but there are often serious restrictions. For example, the loan may become due should an employee choose to leave their job. Getting laid off could also cause the same result.
This is only one example, but it illustrates the need to research options first. What is right for one situation is not always the best choice under other circumstances. This is where a bankruptcy attorney can provide advice based on research and experience on the widest variety of possible solutions tailored to a case-by-case basis.
Source: Fox Business, “Withdrawing vs. Borrowing From 401(k) to Pay Credit Card Debt,” Gary Foreman, April 29, 2013