Should You Use a Loan From Your 401(k) to Eliminate Consumer Debt?

If you have accumulated some savings in a 401(k) plan while also racking up consumer debt you may be in a position to substantially reduce the interest payments you are making on your debts while earning a nice return on your retirement investments.

Before you decide to take this route though there are some things to consider.

1. Do you own a home?

If the answer to this questions is yes and you have some equity built up you're probably better off using a home equity loan to pay off your debts because it is an easier and less complex way to reduce the interest rate and payments on your consumer debt.

2. Will your employment be stable for the next 5 years?

Plan repayment terms vary but a common rule of thumb is non-home related loans from 401(k) plans have to be paid back within 5 years. Do not take out a loan amount that you do not think you'll be able to pay back within the plan repayment guidelines. Any money not repaid will be considered a distribution by the tax man and you will get hit with penalties and taxes that would negate any benefit to employing this strategy.

Also, you need to feel confident you won't be laid off, look for a new job elsewhere, or otherwise change employers for the amount of time it will take you to pay back the loan. If you leave the company most plans will require immediate repayment of the loan and any amount not repaid will be considered a distribution.

3. Will you be able to accommodate the repayments in your budget?

Unlike credit cards which give you the flexibility to vary payments. Typically repayment on loans from your 401(k) are fixed and deducted automatically from your paychecks. Before employing this strategy make sure your monthly budget will be able to accommodate the size of these payments and that you have the financial flexibility to take care of any unexpected expenses should the need arise.

4. Are you comfortable with the possible loss of return on your savings?

While you will be paying yourself interest on the loan you take, about 6% based on where interest rates are today, typically an investment in a stock fund would return more. So you have to decide if you will be able to emotionally handle a scenario were stocks take off and you're stuck with a cash return for a few of years.

5. What are the tax implications?

You will be repaying the loan with money that has already been taxed. When you withdraw money from your 401(k) in the form of distributions down the road those distributions will also be taxed. So you are being taxed twice on the earnings used to pay back the loan. Oftentimes if you earn a substantial salary then this strategy doesn't make financial sense unless your interest rates are exceptionally high.

At this point you may be thinking why would I ever employ this strategy. It seems too difficult and risky to implement. The reason is you could see substantial benefits to your finances if the math works for you.

Below is an example I use to demonstrate how you can figure out if paying off your debts this way is a wise decision.

Bill is 28 and has $10,000 of credit card debt. His salary has averaged $40,000 per year for the 5 years he's had his current job. He expects to remain with his employer for the next 5 years. He has saved 10% of his salary for the last 5 years and so he has $20,000 of savings.

The average rate of his credit card debt is 13% and the average rate of taxes he pays on his income is 20%.

If Bill paid off his credit cards without a loan over the next 5 years he'd pay $13,652.

Assuming Bill pays 6% interest on his loan his repayment will equal $13,382 over the next 5 years.

So Bill's gain from taking the loan is $3,652 (the amount he saved in interest payments) + $3,382 (the amount he payed himself in interest) for a total of $7,034.

Bill's cost are as follows. If he invested the money in an S&P 500 fund and earned 12% he would have $17,623 at the end of 5 years.

Because he has an average tax burden of 20% of income he'll have to earn $12,000 to pay back the $10,000 loan.

The total cost to Bill for employing this strategy is $4,241 (the difference between $17,623 - $13,382) + $2,000 (for the taxes he'll pay) for a total of $6,241.

So Bill's net savings from employing this strategy is $7,034 - $6,241 = $793.

$793 is nothing to sneeze at but Bill may still not want to take out the loan if he's unsure about his employment, expects his income to rise substantially, or if he's not comfortable he'll be able to afford the monthly repayment of $193.33.

Conversely, if Bill was a more conservative investor and expected a lower return on his money, if the average interest rate on his debt was higher, or if he expected his tax rate to decrease he would see more substantial savings from employing this plan.

There is no universally right answer to the question of whether or not to use a 401(k) loan to pay off consumer debt. Use the example above as a framework to figure out if the numbers work for you and then take the plunge if you feel comfortable.

Steve Miller is devoted to helping people eradicate their debt. The web-site he co-founded http://www.debtmd.com offers free debt elimination software individuals can use to create a personal debt elimination plan in 9 minutes and 34 seconds.

Hiring Effective Sales People Worldwide!

APIMage is now hiring effective sales people all over the world to invite prospects to a presentation and close sales utilizing its 10K A Week Wealth Creation System released by Make Money Or Make Excuses creator and CEO of Mentors On A Mission, Al Turnquist. Dornessa Harris says, Al has done it again by creating the best sales job in the world to help level the playing field between Newbies and Experienced home based business owners.

Al Turnquist is paving the path for individuals who want financial freedom by implementing a sales job opportunity that teaches home based business owners how to leverage their time by hiring sales professionals to make calls on their behalf. Due to this cleverly designed income opportunity, Jaguar Marketing System members are able to be in positive cash flow within days of implementation. Named the 10K A Week Wealth Creation System allows effective sales people to earn $400 or $1000 per sale while system owners attend online classes to learn to market their primary business.

The 10K A Week Wealth Creation System takes the meaning of online sales job and financial freedom to a new level. Successful sales people are earning $3,000 to $5,000 per week from home and they are being paid daily. There is no prospecting or presenting. System owners provide the leads. Successful candidates simply work from the comfort of their home, in their own time, fulltime or part-time as an independent contractor on commission.

The 10K A Week Wealth Creation System comes with a Money Back Guarantee. It takes the mystery out of making money online and brings a breath of fresh air to an industry that reportedly has a 95% failure rate. The home based business industry is in desperate need of a big fix. APImage in conjunction with Al Turnquist and the Jaguar Marketing System has created a solution to this growing problem, Effective sales professionals and the $10K A Week Wealth Creation System is creating a following like never before of individuals wanting to make money from home. This has got to be the most exciting business opportunity worldwide.

Sales people who wish to take on the responsibility of creating their own substantial income working from home have a realistic chance to thrive without punching a clock. The 10K A Week Wealth Creation System is backed by a 45 day guarantee which further demonstrates the integrity of the program and provides eager candidates with the essential tools required to be successful.

As a result, Jaguar Marketing System owners are able to earn in excess of $10,000 in any given week.

The Sales Job Description entails:

1. No Prospecting for leads!

2. No Presenting!

3. No Traveling!

Dornessa Harris is an online mentoring coach; trainer and owner of http://www.make1000adayfromhome.com who has help thousands of individual become financially free.Mortgage Leads

A Closer Look At The Roth 401k

Roth 401k is a good retirement savings option. Although it does not provide an up-front tax-deduction, the account eventually becomes tax-free, because the withdrawals taken at retirement are not subject to income tax.

This tax benefit can only be provided to persons who are at least 59.5 years old, or are disabled, and who have held the account for a minimum period of five years. Roth 401k provides an opportunity to save with a different kind of tax treatment. It is a good option for those who are just starting their careers, and expect their income to grow in the future.

Eligibility for Roth 401k:

Anyone whose employer offers Roth 401k is eligible for this investment option. If an employee leaves his/her job, the Roth 401k balance can be rolled over into a Roth IRA. One major benefit of enrolling in Roth 401k is that an account holder does not lose eligibility when the income becomes very high. There is no provision of helping a person open this account if his/her employer does not offer Roth 401k yet. Employers provide a form to their employees to state some, or all, of their 401k contributions that will go into their Roth 401k account.

Difference between 401k and Roth 401k:

401k makes available some tax relief in the year a person may have contributed into the account. However, a 401k-account holder is liable to pay taxes on his/her contribution, along with all the investment earnings, later.

A Roth 401k account holder does not get any tax benefit in the year of the contributions, but all the earnings in the account will be free of tax for as long as the account exists. Besides, a Roth 401k-account holder can roll his/her account to a Roth IRA. The Roth IRA account continues to grow with tax-free earnings for as long as it exists. However, Roth IRA is not available to taxpayers with an income above a certain level.

Advantages of Roth 401k:

Since tax rules allow a person to make it as large as a traditional account, the Roth 401k account is more valuable compared to it. Therefore, saving in a Roth 401k account can make a person much better off at retirement. Given below is a table showing the amount required in a traditional account to have the equivalent of $100 in a Roth Account.

TAX- BRACKET AMOUNT
10% $111.11
15% $117.65
25% $133.33
28% $138.89
33% $149.25
35% $153.85

If a person is in the 33% tax bracket, he/she will have to withdraw $149.25 from a traditional account in order to spend $100. This is because $49.25 is used to pay the tax on the distribution. Roth 401k provides more wealth at retirement, as the distribution from it is tax-free.

While many companies that already have the traditional 401k plans, wanted to implement Roth 401k plans, which have been effective from January 1,2006 according to the law, in reality only a few actually have done it, because of the extra expenses involved. These companies want to first observe the success of Roth 401k before actually undertaking the cost of the implementation.

Roth 401k is a good investment option to save tax-free earnings for retirement. People can take advantage of it to be able to have a secure retirement, which is free from monetary worries.

Joe Kenny writes for the UK Loans Store where you will can compare UK secured loans and offer more information on debt consolidation loans and other loan topics available on site.

How To Choose A Good Investment Property Mortgage

Investment property refers to any real estate asset, which is Non-Owner Occupied. The key intent of such an investment is the rental income that is accrued from it, along with the appreciation in its value over a period of time. Those who possess the necessary funds often look for profitable investment properties. In order to cut down the initial expense, by lowering the down payment, people usually acquire an investment property mortgage for financing their purchase.

An investment property mortgage refers to a loan or lien on an investment property that has to be paid over a specified period of time. In essence, its a personal guarantee that you would repay the money you have borrowed to purchase your investment property. There are several types of investment property mortgages, each with its unique features, benefits and pitfalls.

Fixed-rate mortgage This is the most prevalent mortgage type because the monthly payments are stable. The interest rate throughout the life of the mortgage is the same as that at the outset. The major benefits of a fixed-rate mortgage are inflation protection and a relatively low risk.

Adjustable-rate mortgage (ARM) This type of investment property mortgage has variable interest rates and monthly payments throughout the life of the mortgage. This scheme is popular because it often starts with lower monthly payments and a lower interest rate. The interest rate, however, can change during the life of the mortgage, which means that your monthly payment would change subsequently. It is imperative that you are aware of the nuances of an adjustable-rate mortgage prior to applying for one.

Balloon/reset mortgage This has monthly mortgage payments based on a 30-year amortization schedule (mortgage repayment schedule). In general, the borrower has an option to pay off the arrears or reset the mortgage at the end of a 5-year or 7-year term. Therefore, this investment property mortgage type offers the advantage of a low payment but the mortgage must be completely paid at the end of the specified term.

Investment property mortgage can be availed on several property types, such as an apartment, a condo, any commercial property, or a plot. It can be acquired from leading banks and financial institutions, which typically verify your credentials (income source, savings and credit score) prior to offering mortgage. Selecting an investment property mortgage is as crucial as selecting a property. Therefore, decide on what amount of interest and monthly payments you are capable to mete out, and then select a mortgage accordingly.

Copyright © 2006 Joel Teo. All rights reserved. (You may publish this article in its entirety with the following author's information with live links only.)

Joel Teo writes on various financial topics relating to Ahwatukee Real Estate Investment. Signup for his free online Real Estate Investing newsletter today and gain access to the Six Day Real Estate Investment Profits Course now at http://www.realestateinvestment101.info/Ahwatukee.html