6 Fast Reasons Why Borrowing From Your 401k to Pay Credit Card Debt is a No No
1. The loan is not tax deductible.
2. You over pay on taxes. The consequence is that it is no longer tax-sheltered money. If you repay the 401(k) loan out of your employment salary or from a bank account, those payments are all made back into the 401(k) with after-tax dollars.
3. Penalties. If you don't pay the loan on time, it becomes a premature distribution, causing a tax penalty. That means owing federal and state income taxes on top of a penalty fee.
4. Makes you get into a bad habit. Your 401k is supposed to be a retirement savings plan. Retirement being the key word.
5. You lose money. The interest you can earn on the 401k can be effectively much more than the credit card debt that you owe. If your employer matches your contribution in a percentage amount that is great, it's best to keep your money in your 401k.
6. You lose your cushion. Having a 401k provides a cushion and while paying off debt is good, it is not in your best interest when an emergency happens and you’re short in cash and high in debt.
Don't sacrifice your retirement money. It is obvious that paying off your debt ought to be a high financial priority but shortening what you save for retirement to do so is not the wisest course -- particularly if that becomes a long term loss like reason number 5 by losing out on your employer's matching funds.