Here are three questions from Twitter Followers
Q: Janine Hopkins @ Jay_Neen asked: Is it really that bad to borrow against 401K in cases of emergencies. I'd rather that than a Payday loan right?
Michelle Singletary: When it comes to your retirement savings in a 401(k) plan, your goal should be to let that money grow so you have funds for retirement. Don't consider this money as part of your emergency fund. And yes, I would rather you stay away from a payday loan, which is a debt that a borrower promises to repay out of his or her next paycheck, typically in two weeks and typically at astronomical interest rates.
But I understand the temptation to see a 401(k) loan as better than a payday loan. Many people strangled by debt or struggling with unemployment or low wages turn to their retirement plans as the only stash of cash they have. Looking at participants enrolled in its defined contribution plans, Wells Fargo found that there was a 28 percent increase in the number of people taking out 401(k) loans in the fourth quarter of 2012. The average loan balances increased to $7,126 from $6,662 for the same period a year earlier.
Many plans allow participants to borrow from their retirement plan. You can borrow up to 50 percent of the balance of your plan or $50,000, whichever is less.
In the Wells Fargo survey, of the participants who took out loans, the greatest percentage were people in their 50s followed by workers in their 60s. I mention this statistic because it concerns me that people are borrowing from their plan so close to their retirement years.
One argument for the loan is that you are paying back interest to yourself. And that rate is lower than the interest you are paying on your debt. While that may be true, here are two major reasons against borrowing from your 401(k):
-- When you borrow from your retirement account, you lose the possibility of earning money on your investment.
-- If you fail to pay back the loan, you will have to pay taxes on what you took out in addition to a 10 percent penalty for the early withdrawal.
But in the end I get that loans from a 401(k) plan may be your last resort. If it is, take it out only in dire situations, such as a job loss, disability or major illness.
Q: calvin cousins @cc1159er asked: What is the best way to get out of debt?
Michelle Singletary: There are many ways to pay down your debt but the one I suggest and have used with people I help through my volunteer efforts at my church is called the "Debt Dash Plan," which I wrote about in my recent book, "The Power to Prosper."
I call it the Debt Dash because this payoff plan is like running a 100-meter dash, a quick race. You start by attacking the debt with the lowest balance to get rid of it as fast as possible.
