Last month I wrote How Much Will That 401(k) Loan Cost You?. The other day a reader named Mark left the following comment on that post:
But, I have a different scenario…
Company match is 100% up to 4% of pay, none thereafter.
Contribution is at 10%
401k return so far this year is -8%
I am over 50.
Large amount on credit card (CC) to repair Mom’s house for sale – but there it sits waiting for a buyer in this market.
Rather than take a 401k loan to payoff the CC, I am considering reducing the 401k contribution to 4% so I still get the company match, and get a little extra payroll $$ to accelerate payoff of the CC.
Once the CC is retired, the percentage would go back up to at least 10% (if not more). Once the house sells, I can put the money back in to the 401k in $5k chunks under “catch-up” provisions.
Mark didn’t furnish us with his credit card’s interest rate so it’s tough to say which way makes the most sense financially. If the interest rate on the card is high, then it does make sense to pay if off as quickly as possible even if that means reducing (but NOT eliminating) his 401(k) contributions.
We also have to assume that cash flow is the main issue no matter how the debt is financedwhether it’s on a credit card or some other loan. So we’ll assume that reducing his 401(k) contributions is his only option.
So, based on the information Mark furnished us with, I think his strategy makes sense. I like the fact that he is only reducing his contributions to the point where he still receives the full company match. This is very important since it is free money. It’s not likely to be a good idea to pass up a company match.
What are your thoughts?