How to Use 401k Money to Pay Debt
- 1). Obtain a copy of your latest 401k statement to determine how much money you have available. If you have online access to your account, log on to see your current balance.
- 2). Review your debt situation and determine how much of your 401k you need to withdraw. Since 401k funds are designed to provide you with a comfortable retirement, it is best to limit your withdrawals to money you truly need and cannot get anywhere else.
- 3). Contact your employer and ask if the company has a loan provision in its 401k program. Taking out a loan instead of a withdrawal means you will not have to pay the 10% tax penalty that would otherwise apply. When you pay the money back from your loan, the money goes back into your 401k plan, although you might not be able to make additional contributions until the loan is repaid.
- 4). Complete the 401k loan paperwork provided by your human resources department. Provide all the required information, including your name, address, Social Security number and the account number of your 401k.
- 5). Submit the completed 401k loan paperwork to the address listed on the form. Be sure to make copies of all your paperwork and keep it for your records. Make sure the loan application indicates whether you want to receive the funds via a check or through a direct bank transfer.
- 6). Pay your outstanding credit card bills and other debts with the proceeds from your 401k. Repay the 401k loan through your payroll contributions until the balance is repaid to the plan.
- 7). Contact the administrator of the 401k plan if your employer does not offer a loan provision. Inform the administrator that you wish to withdraw money from the plan and indicate how much you wish to withdraw. Keep in mind that you will face a 10% tax penalty if you withdraw the funds prior to age 59 1/2. In addition to that tax penalty, you will owe ordinary income taxes on the money you withdraw, so only take out what you absolutely need to retire your debts.
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