401(k) 403(b) Retirement Money Ask The Get Out of Debt Experts

Should I Cash Out My 401K to Pay Off My Credit Card Debt? – Angie

“Dear Steve,

Should I cash out part of my 401k to pay off my 136,000 in credit card debt? Is the penalties worth getting rid of all that interest? The monthly payments are getting to high to pay due to the rising of interest rates. We tried to refinace our home but due to the lowering of credit limits our % of debt to available debt is too high. We have credit scores of 700 and have never had a late payment but if we dont do something soon that will change.

Angie”

Dear Angie,

That would be an absolutely horrible idea. It would actually be beyond horrible but I can’t think of a word to use to describe that.

I get it. I understand how you think you’ve got that cash sitting there and you’ve got this debt and you think the cash can pay off the debt. You’ve asked me for my opinion so I’m going to give it to you.

The money in your 401(k) is for your retirement. It’s for those years that are coming when you will not be earning money and you will still need to make sure you can eat and care for yourself. You think being in debt is bad? Try living in substandard housing not being able to turn the heat on and wondering where you next meal will come from. If you retire broke, that’s what could be in store for you.

When you rob your 401(k) you are robbing your future. While $136,000 sounds like a lot of money now, it won’t be in 30 years. If you take that money out now not only will you lose a big chunk of it to taxes and penalties but you’ll also lose all the value that money would have accumulated if you had left it alone. Withdrawing that money now could actually cost you $500,000+ in lost future revenue.

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So let’s say you want to borrow the money instead, Even still that’s not a wise move. Borrowing your own money still means you will lose the value that money would have earned if you had left it in there. It’s not the 6% that money costs you to borrow, it’s the loss of the 20% return it will accumulate.

No matter what way you slice it, it’s a bad move.

Besides, right now if you go bankrupt to repay or discharge your debts that $136,000 is protected from your creditors. And the reason the law permits it to be protected is because your 401(k) is not a savings account, it’s the money that will care for you when you are old.

Go talk to a bankruptcy attorney. Find a local bankruptcy attorney you like and talk about a Chapter 13 bankruptcy that will allow you to keep your house and repay your debts based on what you can afford and please, leave that 401(k) money alone. Please!

Please update me on your progress by posting updates here in the comments section of your question. I’m very interested in how this works out for you.

morehelp1

P.S. Be sure to read ‘The Secret of Surviving Through Difficult Economic Times. What I Learned On My Journey‘.

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About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

7 Comments

  • As far as cashing out 401K to pay off high-interest credit card debt that is killing your monthly household budget……..what if your 401K account has actually LOST considerable amounts of money over the past couple bad-economy years?!!? All this advice talks about how much a 401K account will grow to be when you retire at say 65 yrs old……but what if we keep having severe market drops over the next 20 years that keep knocking the account back to square-one, and also what if you only live to be say 63 or something anyways??!!??

    At one point a couple years ago I had a 401K with about $80k in it, and now that same account has only $45k! So it lost nearly $35k that had been in there, PLUS it lost all of the money that I had continually been contributing to it (10% of paycheck) over the past 2 years and my employers 50% matching as well. So it really lost more like $75k…!!!

    So you’re killing yourself now to make ends meet for a future that may never come and that you cannot “count” on for sure anyways.

    Taking all that into account, is it still an “absolutely horrible” idea to try to have a much happier debt-free life right now, and start building a potential retirement account all over again??

  • Angie,

    Listen to Steve!!!! A Chapter 13 bankruptcy is available. Depending on the size of your household, a Chapter 7 may be available also if you are current on your mortgages.

    Do not touch your 401K.

    Speak to a local bankruptcy attorney to learn more about how it can work for you.

    Please also review your income tax situation. If you are planning to get a tax refund of $1000 or more you are overwithholding. If you plan on getting a $3600 refund, you missed the opportunity to have an extra $300 per month in your pocket to help with your everyday living expenses.

    Asking Steve for advice is a great start.

    Best of Luck

    • Jeff,

      Excellent point on the tax withholding issue. This especially comes to light at this time of the year when we both hear about people that say they are waiting for a big tax refund check to come and dig themselves out of the debt hole they are in. You are absolutely right, they could have really benefited from the extra cash each month.

      Steve

    • Angie,

      Yes, you need to talk to the attorney about a Chapter 13 bankruptcy. You might make a decent paycheck but the primary factor is if you have enough money to repay your debts on a monthly basis.

      Steve

  • Thanks for your response. Through reading comments on your site we have realized that cashing out the 401k is the last thing to do. We have stopped our 401k contributions ($700 a month) for the time being (to improve cash flow) and considering a Debt Management Program with a non- profit organization. What are your feeling about DMP? Thanks again!

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