Alert
Close

Help hungry seniors. Deliver help and hope before Thanksgiving. Donate

Highlights

Open

You and Your Town Contest-You could win an AARP RealPad

AARP Auto Buying Program

Contests and
Sweeps

$10,000 Winter Escapes Sweepstakes

Beat the cold and cozy up to a chance of winning $10,000! See official rules.

Driver Safety

Piggy bank on the road - AARP Driver Safety

Take the new AARP Smart Driver Course!

AARP Books

Visit the Money Section

Enjoy titles on retirement, Social Security, and becoming debt-free.

Jobs You Might Like

most popular
articles

Viewed

Pay Down Your Debt Challenge

The One Time You Can Use Retirement Money to Pay Off Debt

Most of the time it's not worth raiding your nest egg, but this loan can be the exception

OK, back to our example. You've got $20,000 worth of credit card debt and that 15 percent interest isn't making it any easier to pay off.

Your credit card company only requires that you pay 2 percent of the outstanding balance each month. In other words, your required minimum payment is $400 per month. At that rate, you'll pay off your $20,000 balance in 6 years and 7 months. And over that time, you'll pay a total of $11,577 in interest.

To avoid this scenario, take a loan from your retirement plan at work, but only if:

  • You can set up a repayment plan that is three years or less
  • You reasonably confident that you will remain with the same company during that three-year period

The reason you want to limit the time your loan is outstanding is two-fold. First, the sooner you repay the funds, the quicker they can begin earning interest again. Equally important, though, you want to repay that loan as soon as possible to reduce the risk associated with you leaving the company for some reason.

When you separate from an employer for any reason — including termination or just you getting a different job — any outstanding retirement loans generally come due. Sometimes, you'll have 90 days or so to repay the loan in full. The specifics depend on your company's retirement plan. But any funds not repaid within a brief, specified time period are typically treated as taxable distributions to you.

You want to avoid the IRS taxing you on any money you take out of a retirement plan for the purposes of reducing debt. And a loan from your retirement plan can be the smart way to do just that.

With a 401(k) or 403(b) loan, you pay yourself back the money you borrowed plus you repay yourself interest too. Best of all, the loan immediately gives you the economic benefit of quickly reducing that high interest rate credit card debt that's draining you financially.

Lynnette Khalfani-Cox, The Money Coach®, is a personal finance expert, television and radio personality, and a regular contributor to AARP. You can follow her on Twitter and on Facebook.

Topic Alerts

You can get weekly email alerts on the topics below. Just click “Follow.”

Manage Alerts

Processing

Please wait...

progress bar, please wait

Tell Us WhatYou Think

Please leave your comment below.

The Cheap Life

Jeff Yeager Cheap Life Ultimate Cheapskate AARP YouTube web series save money

Catch the latest episode of The Cheap Life starring Jeff Yeager, AARP's Ultimate Cheapskate. Watch

Discounts & Benefits

From companies that meet the high standards of service and quality set by AARP.

Life insurance: you are covered rain or shine

Exclusive annuities for members from AARP Lifetime Income Program from New York Life.

AARP Credit card from Chase

Members can get cash back rewards on purchases with the AARP® Credit Card from Chase.

Homeowners Insurance
Member Benefits

Join or renew today! AARP members receive exclusive member benefits & affect social change.

Rewards for Good

Your Points Balance:

Learn More

Earn points for completing free online activities designed to enrich your life.

Find more ways to earn points

Redeem your points to save on merchandise, travel, and more.

Find more ways to redeem points