Tuesday, February 22, 2011

401K Debt Reduction

Many people started experiencing financial trouble during the recession, and nothing can be more damaging than high interest unsecured credit card debt that isn't getting paid off. Unfortunately, the current trend of using your 401k as a way to get a secured debt consolidation loan can lead to trouble down the road that is best avoided if at all possible. Read on for a few reasons why using your retirement money for consolidating credit card debt is a mistake.

Your 401k Should Stay Tax Free And Interest Building

Using part of your 401k balance to secure a debt consolidation loan means the money that you borrow stops saving you tax money and building interest. While your retirement fund is left alone, it compounds interest on tax free cash constantly. If you use that money as collateral for a secured debt, it just sits there doing nothing until your debt is paid off. For many people this down time can end up pushing back a comfortable retirement due to the financial burden it will cause in later years.

Never Risk Your Retirement Savings

While your 401k may seem like a safe source of money, that could change if you are ever fired or laid off. With economic troubles surprising many people with unexpected job loss, using your retirement money on debt consolidation instead of enrolling in a debt counseling service can be a huge risk. Your loan may need to be paid in full immediately, and there is no guarantee you'll be able to transfer your 401k to a new employer fast enough to avoid the problem.

Instead of using your 401k for debt consolidation, consider looking into a plan that will help you get your debt handled without touching money you need. There is no reason to put your potential future retirement at risk to pay off debt right now.

Sandra White is a writer for FranklinDebtRelief.com.

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