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I’m Thinking of Taking Money Out of My 401(k) to Pay Down Debt

“Dear Steve,

Hi – I am a 50 yearld old man with a good income but I am in a financial pinch for sure. I have 2 kids in college right now – one is freshman and the other is a junior – both a tier 1 schools (not cheap).

In 2009 I changed jobs – prior to that I was making $125K in salary with am at risk bonus that for the last few years was bringing in an additional $40-60k. Now my salary is the same but the bonus potential in about halfed.

I currently owe about $30K in credit card debt – recently the back said they ere raising the rate to 24.99 until July after which it will go to prime + 21.74%.

I also have 3 parent plus loans that total about $25K (older kid went to school 4 years but didn’t graduate and is unable to find work and is a home now.

I owe about $45K on my first mortagae on a $140K valued home and have used $16K on a $25K equity line of credit.

I have 2 401K accounts – one (with current employer) is valued at $275K made rebound iin 2009. I have $12K loan against this that will clear iin June 2011.

I also have a differnt 401K with former emeployer thath I no longer contribute to worth about $125K.

The credit cards are killing us – we make minimum payments but see that we will never pay off this way. I am paying some $500 a month on interest alone

I have no car note – but a fleet of 10 year old cars

I understand that I will take a big ding on taxes and penalty to tap the old 401K but I am consdering it to just take enough to clear my credit card and student parent loan debt.

We are emotionally wrecked by this debt situation. Peace of mind is worth something

When I retire I will have a traditional pension and 40k – I plan to work to age 63 or 65.

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Any help appreciated


Dear Ben,

What I read between the lines here is this is really a monthly cash flow problem. The student loan debt can’t be at a high interest rate so the stress you must be feeling comes from the combined monthly obligation. Is that correct?

The 401(k) is money in your name for retirement. If you’ve read this site before or searched for previous answers on 401(k) loans you will know I’m dead set against taking money out of them. As long as that money is kept in the 401(k) it is protected from creditors and you don’t take a huge tax and penalty hit to take it out.

You might want to first look at a possible unsecured debt consolidation loan through This would give you a lower fixed rate loan to payoff most of the credit card debt without having to tap the 401(k).

If this is truly a cash flow concern and a debt consolidation loan isn’t a consideration then the most logical approach would be to look at a Chapter 13 bankruptcy. With that approach the 401(k) would remain untouched, the credit card debt would got to 0% and the payment would be based on what you could afford. It would be a good idea for you to click here to find a local bankruptcy attorney you like and make an appointment to go in and discuss it with them. Talking to them does not mean you are filing, but it does mean you are wisely exploring your options so you can make the best decision possible.

After you talk to the attorney you may still come to the conclusion to take the money out of the 401(k) but at least you will feel confident in making an informed decision at that point.


You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.

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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.

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