Why Didn't I Think of That?

Many people hold bonds in their 401k accounts yieding 3-4% while also paying credit card interest of 20%. This credit card interest can be a large burden, squeezing out other purchases, reducing one’s living standard, hurting one’s credit rating and abiity to quaiify for a mortgage, and increasing the likelihood of bankruptcy.

At 20% interest, if you make the minimum payments, you are paying the credit card companies the equivalent of the entire principal balance…without paying off a nickel of the principa balance.

Why not let people “borrow” from their 401k (or IRA) to pay the debt immediately…and then repay their 401k over 5 years by making the exact same payments they were making to the credit card companies? At the end of five years the retirement account is whole while the consumer is debt-free.

A couple of wrinkles. First, this could only be done once. Running up a credit card debt once is a mistake. Twice is ingrained bad self-discipline.

Second, there would have to be a disincentive against running it up again while you are paying it off– perhaps a tax penalty? So that, once you trigger this one-time amnesty, any further interest rate payments (which are already reported at tax time) incur a tax. Or maybe 50-50 a tax and a mandatory extra contribution to your own retirement account.

(Yes, the “rules” for ideas say no new taxes but this is a “voluntary” tax that people ony sign up for if (1) they join this program and (2) abuse it.)

Borrowing from one’s one retirement account is already allowed for certain purchases. Why not add this to the list?