‘My family is in a tight spot’: How can I pay off $40,000 in credit card debt by using a solo 401k loan with no self-employment income?

Hi Money Minder,

So, I’ve had this business for a while now, but I’ve kind of let it slide this year. My family’s in a bit of a pickle, with about $40,000 on a credit card racking up high interest. I thought I could pay it off quicker by setting up a solo 401k, transferring my old 401k into it, and then taking out a loan.

Here’s the thing – I’m not actually making any income from my business this year, and I don’t plan to contribute anything since my self-employment income is zip. But here’s the twist – does paying off the loan count as contributing? And is there a better way to tackle this whole situation?

Thanks for any advice you can give me!

Eager to hear from you soon,
Struggling Entrepreneur-Turned-Seeking Help

Response from THE MONEY MINDER:

Hello There,

I understand your situation and the stress that comes with having a significant amount of debt, especially with high-interest credit cards. It can feel overwhelming, but you are taking proactive steps to address it, which is commendable.

Creating a solo 401k, rolling over your old 401k, and taking a loan against the 401k can be a viable option to tackle your debt. However, it’s essential to be aware of the implications of taking a loan from your retirement savings. When you take a loan from your 401k, you are essentially borrowing from your future self, and if not repaid, it can have lasting consequences on your retirement funds.

Regarding your question about whether the loan counts as contributing to the 401k, the loan repayment doesn’t count as a contribution. It is a loan that you have to pay back, typically through payroll deductions or other means.

Before proceeding with this approach, I would recommend consulting with a financial advisor or tax professional to fully understand the tax implications, repayment terms, and any potential penalties associated with taking a loan from your 401k. They can provide personalized advice based on your specific financial situation and help you make an informed decision.

Remember, addressing your debt requires discipline and a solid financial plan. Cutting back on expenses, looking for additional sources of income, and creating a budget can also help you make progress towards paying off your high-interest credit card debt. Stay focused on your goal, and you can overcome this challenging situation.

Take care, and best of luck on your journey to financial stability.

Farewell from THE MONEY MINDER.