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Dear Catey,
I am a 40-year-old law-enforcement officer and hope to retire in 13 or 14 years. At that time, I will have 30-plus years on the job with a pension giving me 70% of my current income with a cost-of-living annual percentage increase around 2% or 3%.
Additionally I have a little over $60,000 in a 457(b) plan. But I also have $17,500 in credit card debt with interest ranging from 9% and 16%. Is it a good idea to borrow from your 457(b) plan to pay off credit card debt? I think doing so would mean I was stress free from debt, plus I’d be paying myself back with interest on a five-year plan. What’s the right move?
Thank you,
Frank
Dear Frank,
You’re not alone in your struggle with credit card debt: More than half (55%) of U.S. adults who have credit cards say they also have debt, a survey from CNBC and Morning Consult revealed in 2019. And those debt levels have been rising — last year, “credit card balances retouched the 2008 nominal peak,” wrote the New York Federal Reserve.
Having that credit card debt can take an emotional toll, too: Six in 10 people with credit card debt say they find it stressful, one survey revealed. So should you rush to pay it off with your retirement funds? We asked the experts.
In general, “taking a loan from any retirement account should be treated as a last resort option,” says certified financial planner Bobbi Rebell, host of the Financial Grownup podcast and co-host of the Money with Friends podcast.
The reason? “This can be a slippery slope if you don’t have a good handle on your cash flow or a plan on how you want to achieve your retirement goals. In general, it is not a good idea to view your retirement funds as a bank for short-term needs. The worst thing you can do is shift your debt to your 457(b) then accumulate more credit card debt over time,” explains Amin Dabit, the vice president of adviser services at Personal Capital.
Plus, “the biggest obstacle is that you are missing out on potential growth during the time you pay back the loan. Yes, you are paying back interest, but the ‘opportunity cost’ could be much greater. Another thing to consider is that many times, the savings from paying off credit card debt is not reinvested,” says Michael Macke, the owner and principal adviser of Petros Financial Group, Tax & Wealth Advisors. “If you can have the discipline to pay off the loan and increase savings it might be worth it, but the missed potential opportunity is still an issue.”
So what you should do right now is to take a deep look at your spending and see where you can make cuts to pay off that debt without having to take a loan from your retirement account. “If after reviewing your cash flow, you find that you can pay off the credit card debt within a year, then you can consider finding a lower or zero interest rate credit card and focus on paying it down aggressively within that year,” says Dabit.
Rebell asks: “Could they do a side hustle for a short period of time and put that money toward the debt? I would encourage them to look for options that don’t include taking money from their retirement fund, especially if they want to retire so young.” And though he has a pension, Rebell points out: “No one ever complained they had too much money in retirement.”
But if those options are not possible, “then borrowing from your retirement funds to pay high interest credit card rates can make sense as a short-term solution,” Dabit adds.
Rebell agrees, adding that: “If you are paying a very high interest rate on a credit card, you can lower it by taking a loan from a retirement plan, if that plan allows it. In almost all cases that is a better choice than a withdrawal, which will incur a penalty and lower your retirement savings and investments,” she says.
But, she notes: You need to be “aware of the risks of missing payments, or having to repay the loan back quickly should you leave your job” as well as the possible “tax consequences down the road because in most cases the interest paid on the loan will eventually be taxed.”
A previous version of this story misstated the tax implications of a 401(k) loan. The detailed tax implications of a 401(k) loan can be found on the IRS website here.
