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Should I Cash in my 401K to Get Out of Debt? – Mona


“Dear Steve,

We just finished building our home (we were the contractors). Before we started we had very manageable debt and our credit scores were almost 800. We used a construction to permanent loan(5.5%) and credit cards to build our home. Now that we are finshed we have a $255,000 mortgage and owe $85,000 on credit cards. My husband makes $100,00 per year and we have $110,000 in his 401k (shrinking daily). We also have a $600 car payment. Needless to say we are in a mess. My best calculations have us $1500 short of making mortgage, car, and minimum credit card payments.

Should we or can we cash in his 401k? I never thought we would consider this option, but we don’t have a lot of confidence in the market right now. I would rather get out of debt and then invest heavily on our own. My husband is 45 and I am 43.


Dear Mona,

Should you cash in your 401(k) to pay off or pay down your debt? No!

After paying taxes and penalties for cashing out the retirement funds you would be left with potentially enough to pay off your credit card debt, and that would be a good thing. But if you do that you will be just another in a long line of people that has no funds saved towards retirement. That’s a dangerous position to be in.

Generally 401(k) money is protected from creditors and even if you decided to do something like a Chapter 13 bankruptcy so you can keep the house your money would be allowed to remain untouched in your retirement account.

Don’t let your feelings of stress and frustration lead you to make a mistake, like cashing out the retirement fund, that will leave you eating dog food latter in life. I hear from enough people at the edge of retirement with no money saved at all. I don’t want that to be you.

Sure the investments are horrible right now, but they will go back up. Don’t despair about that. And when they do then your retirement funds you feel are small now will grow, and grow, and grow.

My bigger concern is that even without your credit card debt, with the numbers you gave me, you might just be getting by instead of being $1,500 short each month. If that is the case then it is not a safe position for you to be in and more cuts may be necessary. You might have to consider doing something more, like give the house back to the bank and start over again. People do it everyday. You can too.

Please use this link to get a free bankruptcy consultation and after you meet with the local bankruptcy attorney, come back and give me an update on what you decide to do.

Don’t risk your future safety just to avoid feeling bad about bankruptcy today.


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.

1 Comment

  • Hi Steve

    After years of putting money aside in my 401K, over the last 6 months I have seen it drop rapidly. I have stayed the course thinking that it is a long term investment but my fear is that the Fidelity and other funds will continue to slide until my investments are worthless. Is it time to pay the piper, take the tax loss and cash in before the funds lose all value and I end up with nothing.


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