401K Loans Being Used to Consolidate High Rate Debt

Even some consumers with good credit and an excellent payment history are finding their card rate being hiked to as high as 28%. With banks aggressively cutting access to home equity lines as well, more people turning to their retirement account as a source of cash.

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Quote startIt's no wonder that more people turning to their retirement account as a source of cashQuote end

Alexandria, VA (PRWEB) April 18, 2008

To their dismay some consumers with good credit and an excellent payment history are finding their card rate being hiked to as high as 28%. Now banks are aggressively cutting access to home equity lines as well. "It's no wonder that more people turning to their retirement account as a source of cash," says Lamaute of Lamaute Capital, at InvestSafe.com

Tapping one's nest egg should be used only as a last measure, says Lamaute, 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 ¼%, 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, according to Lamaute. 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.

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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