Banks are putting the squeeze on even their best long term card holders at a time when other sources of credit, such as home equity loans for example, are harder to come by. A lot of people are shocked to receive notices that their credit card rate has jumped to as high as 28% even though they’ve kept good credit and an excellent payment history.
With the soaring cost of fuel, food, and other necessities it means that a large number of Americans will be unable to cope with these higher card rates and are at risk of sinking deeper in debt.
As an answer, some people are tapping their retirement accounts to pay off their high credit card debt. Tapping one’s nest egg should be used only as a last measure, but for those who decide to go that route getting a 401(k) loan may be a smarter move than taking a distribution from an IRA or 401K and being hit with taxes and a 10% early withdrawal penalty. That’s because with a 401K loan:
There are no taxes and penalty on early withdrawal as long as the loan is repaid on time according to the loan terms.The interest paid on a 401(k) loan is credited to the 401(k) account - so borrowers pay interest to themselves, not to a bank or other lender.The 401(k) loan is set as low as prime rate, recently at 5 1/4%, is fixed for the 5 year normal term of a 401(k) loan.Employees should ask their employer if their 401(k) plan allows loans. Those who are self-employed, such as independent contractors and individuals with their own business (part-time or full-time) can set up their own Self-employed 401k plan with a loan feature.
One can transfer funds from IRAs, 401k from a previous employer, SEP plan or other qualified retirement funds to a Self-employed 401(k) and borrow up to a maximum of $50,000 or 50% of the account balance, whichever is less.
A loan from a Self-employed 401(k) is easy to obtain because you are in effect borrowing from your retirement account, and repaying the interest and principal to your 401(k) account.
Make sure, however, to follow the 401(k) loan guidelines. A default on a 401(k) loan while not reported to the credit bureaus is reported to the IRS. You’ll have to pay taxes and a possible 10 percent tax penalty on any outstanding 401(k) loan balance.
Copyright: Copyright © 2008 Daniel Lamaute
About the Author:| Lamaute Capital, Inc., (http://www.InvestSafe.com). Lamaute Capital is an investment firm that specializes in setting up retirement plans for small business owners and non-profit organizations.
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