WASHINGTON, D.C. — Consumers stung by the sudden doubling of their minimum required monthly credit card payments are finding new ways to eliminate credit card debt by replacing their card debt with cheaper alternatives such as 401(k) loans, said retirement plan expert, Daniel Lamaute, CEO of Lamaute Capital, Inc. (InvestSafe.com).
Millions of individuals will find themselves unable to pay the hundreds of dollars more required per month on their credit card bills. And, with already stretched budgets the most vulnerable consumers may fall deeper in debt trouble. That’s because, some credit card companies, if you are just one-day late with a payment, will immediately hike the interest rate on the card balance to as high as 29 percent, in addition to charging a late fee.
“We are already seeing a surge of inquiries about the 401(k) loan as consumers look for ways to eliminate their high credit card debt,” says Lamaute. Key attractions of the 401(k) loan are:
* There’s little paperwork, and there’s no credit check.
* The interest paid on a 401(k) loan is credited to the 401(k) account – so borrowers pay interest to themselves, not to a bank or other lender.
* There are no taxes and penalties on early withdrawal as long as the loan is repaid on time according to the loan terms.
* The Interest rate on many 401(k) loans is set at prime rate and is fixed for 5 years, the normal term of a 401(k) loan.
One should contact his employer to learn if their 401(k) plan allows loans. Independent contractor and individuals with their own business (part-time or full-time) can open their own Solo 401k plan with a loan feature.
It’s possible to transfer funds from IRAs, 401k from a previous employer, SEP plan or other qualified retirement funds to a Solo 401(k) plan and borrow up to a maximum of $50,000 or 50% of the Solo 401(k) account balance, whichever is less.
Make sure, however, to follow the 401(k) loan guidelines. Defaulting on a 401(k) loan is very costly indeed, and will cause the outstanding 401(k) loan balance to be treated as a withdrawal subject to tax plus a possible 10 percent tax penalty.
Lamaute Capital, Inc. (http://www.InvestSafe.com) is an investment firm that specializes in setting up retirement plans.