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401(k) loans should not be first choice to help consolidate debt

For some Florida residents and others around the country, the amount of debt they have incurred seems overwhelming. To reduce the debt, several alternatives are considered by consumers. Most elect a balance-transfer credit or a personal loan to consolidate debt, while others take out a home equity loan. However, those that decide to pursue a 401(k) loan may be taking undue risk.

A 401(k) loan can be obtained when someone borrows money against his or her retirement savings account. According to a retirement investment company, around one-fifth of plan participants have a 401(k) loan. Interest rates are low and payments go back into an individual's account. However, there is a risk for taxes, penalties and faster repayment should someone lose a job. In fact, there is a 10 percent default rate for this type of loan.

Notwithstanding the risks, opening a 401(k) loan can create a slowdown in saving for retirement. Many financial analysts do not recommend getting one in most circumstances. However, a 401(k) may, in fact, be an acceptable option in some scenarios. Some experts advocate taking one out if the level of credit card debt is exorbitant and no other means of repayment is feasible.

For some, consolidating debt helps them save a considerable amount of money in interest payments. Investors need to evaluate the impact it will have on their retirement balances. The tax implications must also be considered, as a default on this type of loan would be deemed as a taxable distribution.

Experts suggest alternatives such as personal loans or balance transfer cards to consolidate date before pursuing a 401(k) loan. Those seeking relief from credit card debt should discuss their situation with a Florida bankruptcy attorney. A knowledgeable lawyer will help clients determine the best course of action to get them back on track financially.

Source: nerdwallet.com, "A High-Wire Act: Paying Off Debt With Retirement Money", Jeanne Lee, July 7, 2017

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