Q: I have some high-interest credit card debt and was considering a loan from my retirement account to pay it off and save money on interest. How much can I borrow and is it a good idea?
If your plan administrator allows it, you can borrow from your 401(k). The maximum you're allowed to borrow is $50,000 or half of your account's value, whichever is less, but if your account is worth less than $10,000, you may be allowed to borrow the entire amount.
401(k) loans also must be paid back within five years, unless the proceeds are used to buy your primary residence.
I'm generally opposed to using 401(k) loans unless there's a good financial reason to do so and you don't have any other types of low-interest borrowing available, such as a 0% APR balance transfer or a personal loan with comparable interest. Sure, you'll be paying yourself back with interest, but the "prime plus 1%" charged for most 401(k) loans is far less than the historical long-term returns of a typical 401(k)'s stock and bond portfolio.
Having said that, a massive amount of high-interest credit card debt could certainly be a good reason to borrow from your 401(k) if you don't have any other options. This is especially true if you use the money you save on interest to add to your retirement savings.
Finally, there's no such thing as an IRA loan, so you'll get hit with a penalty for withdrawing money from your IRA without a qualified reason.
Offer from The Motley Fool: The 10 best stocks to buy nowMotley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. In fact, the newsletter they run, Motley Fool Stock Advisor, has tripled the S&P 500!*
Tom and David just revealed their ten top stock picks for investors to buy right now.
*Stock Advisor returns as of March 5, 2018.
The Motley Fool has a disclosure policy.