Taking Loans Against a 401(k)

Reader Question:My wife and I make $100,000 a year combined, and we have about $12,000 in credit card debt. We also owe another $80,000 in student loans, and our kids’ private school education costs $1,000 a month. Is it okay for me to take a loan against my 401(k), which is invested in mutual funds, to clean up the credit card bills?

dave_ramsey I wouldn’t do that. If your 401(k) is invested in good mutual funds, it’s likely you’ll miss out on some pretty good rates of return. But that’s not the biggest reason this is a bad idea.

The biggest reason is that when you leave your company — and you will leave, whether it’s because you get a better job, you get fired, or you die — that loan is considered an early withdrawal. If you don’t repay it within 60 days, you’ll get hammered with a 10 percent penalty plus your tax rate. You could easily lose almost half of what’s in the account.

If you want to start paying off debt, my advice is to start doing things to generate extra income and begin living on a tight budget. Grab an extra, part-time job for a while, too, and have a big garage sale. Sell so much stuff the kids think they’re next! You need to work a serious debt-busting plan.

The good news is it’s only $12,000. Knocking out the credit card debt won’t be so bad, and with your income, the kids’ school isn’t unreasonable. It’s the $80,000 in student loans that’s killing you. Scrape together and save every penny you can find each month, and put that toward paying off the credit card debt. Then, roll that amount over, add anything else you can come up with, and attack those student loans.

Dave Ramsey

Dave is the author of The New York Times best-selling book Financial Peace. He is also the host of the nationally syndicated The Dave Ramsey Show, and is a regular guest on television. All of his financial counseling is based on biblical truths. You can hear Dave from 9 a.m. to 11 a.m., weekdays online at www.daveramsey.com. Send your questions toaskdave@daveramsey.com. He resides with his wife Sharon and their three children, Denise, Rachel, and Daniel, in Nashville, Tennessee.

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