A misguided loan
Ashley Patrick, 34, regrets a 401(k) plan loan she and her husband took. The couple, who live in Charlotte, North Carolina, wanted money for a home remodeling project, and it seemed like a sensible strategy.
They were years from retirement. They had one child and were expecting a second, and they needed the extra space. Her husband’s coworkers, who seemed financially savvy, said it was a perfectly reasonable option.
Things snowballed, and not in a good way.
The first problem: The couple didn’t fully understand the loan. Patrick assumed it would use the 401(k) account as collateral – instead of an actual withdrawal. She was shocked to see that the account balance had dipped by $25,000.
Then, about a year into making payments, Patrick’s husband was laid off – and informed he had 30 days to pay back the outstanding balance. That amounted to nearly $20,000, a large sum to have to suddenly come up with. They could not do it.
Since they did not repay the loan on time, the IRS counted it as income, boosting their bottom line on the following year’s tax return. They wound up with an unexpectedly large tax bill.
The couple decided to put the remainder on a 0 percent interest balance transfer credit card. They threw all their muscle into paying it off in 18 months. “I didn’t know a lot, till it all happened to me,” Patrick said.
For people who find themselves also regretting a debt they took on, Patrick recommends paying it off as quickly as possible.
Silver lining: Patrick determined to educate herself about her finances, and today she blogs about her expertise on her own personal finance site, where she helps other people get a grip on their money.
Actionable Items
IRS, 401 K is not a good option to borrow money from. The tax is the issue if it cannot be paid back.
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