It’s normal to be engaged in a lot of pre-wedding planning as well as making some lifestyle changes. It is understandable to want a clean financial slate going into your marriage. Borrowing money from your 401(k) to reduce debt is not the way do it. Consider other options.
Penalties add up
Accumulating credit card debt is often a symptom of living beyond your means. This can lead to poor credit management and overspending – neither of which you want to bring into a marriage. Taking a distribution from your 401(k) to pay off credit card debt can be very expensive. A distribution is a withdrawal from the account that is not repaid. The IRS treats this as ordinary income. If you are under 59 ½, you’ll pay income taxes on the money withdrawn in addition paying to a 10 percent penalty. Also, those funds will no longer be available to grow for your retirement.
If you have no other resources, an alternative to a distribution is a loan from your 401(k) plan if your employer allows this. You would avoid ordinary income tax and early withdrawal penalties. Plus, you would have up to five years to repay the loan.
Better yet, instead of tapping into your retirement account, try cutting your spending. Start by creating a budget to establish boundaries for spending. If you can agree with your new spouse to cut expenses and create a debt reduction plan together, you may be able to eliminate your debt without using your retirement funds.
Do not accumulate any more debt. Prioritize your existing debts and find ways to make additional payments by eliminating unnecessary expenses. This way you do not damage your retirement savings, incur taxes and penalties, nor do you merely shift your debt from one shelf to another.
Article provided by Local Government Federal Credit Union.
The advice provided is for information purposes only. Consult your financial advisor or tax advisor for additional guidance.