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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

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

Damon Day - Pro Debt Coach

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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.
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