For the second year in a row, the number one New Years Resolution was to “Manage My Debt” and many people are considering borrowing from their 401(k) in order to do this.

The advantages of borrowing from your 401(k) are that since you are effectively borrowing your own money, from yourself, the interest you pay, as well as the principal, goes right back into your account. The loan process is fairly easy and you have 5 years to repay the debt.

However, there are several disadvantages as well.  First, if you happen to leave your job or are fired, the money you borrowed will be due in one lump sum within days or weeks of your departure.  If you do not have the money to repay the loan at that time, your remaining loan amount will be taxable to you as ordinary income.  If you are younger than 59 1/2 at that time, you will also pay a 10% federal penalty. 

Second, in order to give you the money, investments in your portfolio are liquidated which translates in to a loss of interest income and ultimately retirement income.  If you can avoid a loan from your 401(k) plan, please do.

How are you managing debt this year?

This entry was posted on Tuesday, January 12th, 2010 at 5:00 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.