How to Pay Off Credit Card Debt with a 401K Loan

Updated: Jan 26

Have you left your recent employer and suffering from Credit Card Debt, endlessly searching for a way to pay it off fast? Did you know you could be paying off Credit Card Debt with your retirement fund like an IRA or a previous 401(k)?

According to WalletHub, average credit card interest rate is 17.98% for new offers and 14.58% for existing accounts. While on the other hand, retirement accounts yield a measly 5-7% interest.

In respect to retirement accounts, according to one of the richest people in the world, Warren Buffet, he says:

“We should expect to make a 6%-7% annual return in the stock market over the long term.”

If money in your left pocket is losing you 17.98% a year and money in your right pocket is making you 7% a year. Then that means you’re going backwards financially in the long run.

If you’re struggling to pay off debt due to high interest rates and you have a retirement fund, there is a little known solution that can fix this.

Maybe you already thought of taking money out of your retirement account. Only to find out if you took money out of the IRA/401k you would pay 20%-30% in penalties and taxes to the IRS.

Let’s put that into perspective. That would mean if you withdrew $20,000 from your retirement account right now to pay off your credit card debt. You could lose $5,000 in penalties/taxes to the IRS.

However, just below I’ll show you a way to access your 401K funds early & penalty free!

PLEASE NOTE: If your 401K is still attached to your employer, you can borrow against your 401K using the methods we explain below.

How to Pay off Credit Card Debt with Your 401K Retirement Account

If you recently invested money into some kind of business or side hustle, and you don't have any w2 employees. Then you can borrow money from your retirement account penalty and tax free through the use of a Solo 401k.

What is a Solo 401K Account?

A Solo 401(k) is a 401(k) qualified retirement plan for Americans that was designed specifically for employers with no full-time employees other than the business owner and their spouse.

Did you know, an IRA or a 401k from your previous job can be converted into a Solo 401k?

The IRS will allow you to be your own bank instead of being at the mercy of the banks, paying them 17% a year in interest. Thus, the IRS will allow you to withdraw money from your Solo 401k penalty and tax free under the following conditions:

Conditions to Withdraw Funds Penalty & Tax Free from Solo 401K

  • Take out up to 50% of account value or $50,000 (whichever number is less)

  • Must pay your Solo 401k back the amount you take out within 5 years to avoid paying any penalties and taxes on the money taken out.

  • IRS requires an interest rate on this loan. Its prime + 2% so interest rate would be 5.25% at the time this article is written. The 5.25% would be interest going back to your Solo 401k.

When Should You Pay Off Credit Card Debt with Your 401K?

You’re probably asking yourself: “When does it make sense to pay off debt with a retirement account?”

Let’s look at a concrete example below:

Say you owe Bank Of America $20,000 on a credit card that is charging you 17% per year. After taking a look at your retirement account statement balance, you realize that your $50,000 retirement fund is only making 6% a year through interest. Thus, you're spending $3,500 a year on Credit Card interest while making $3,000 on your retirement interest. Therefore, you're actually losing money every year!

So after learning that you can pay off credit card debt with your retirement account. You look into converting your retirement account into a Solo 401k.

Your Solo 401k now has $50,000 in it, that you can access penalty free. After taking out $20,000 from the Solo 401K to pay off your credit card debt in one shot. You’re now making monthly payments back to your Solo 401K, where you’re gaining back the 6% interest every year.

A strategy like this may not make sense for everyone. It could be that your retirement account is investing in high stock performers like Tesla or Amazon with a minimal 5% interest rate on your credit card debt.

Call Us: 1-844-401-5473

You should talk with an experienced agent to see if this is a proper strategy for you.

Albert Einstein had a great quote about interest, he said in regards to interest:

"He who understands it, earns it; he who doesn't, pays it".

Fastest Ways to Get a Solo 401K Loan

1. DIY Solo 401(k) Loan

You can do it yourself, but the amount of paperwork, phone calls, and financial procedures can be overwhelming, time consuming, and possibility of errors in filing the proper forms can be costly.

2. Talk with an Expert in Solo 401(k) Loans

The easiest and most efficient way to a Solo 401k is to call the professionals at Quest Education at 1-844-401-5473 where they will do all the heavy lifting for you.