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Should I Cash Out My 403(b) Retirement Account to Pay Off Credit Cards

Gwen

“Dear Steve,

My husband and I have some pretty high debt on our credit cards and as he is self employed the economy has taken its toll on his income.

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As an educator I have a 403(b) with enough money in it to PAY OFF the credit cards completely. While it is not an ideal situation by ant means, it will take the burden off of one paycheck going completely to paying off just the minimum due each month on those credit cards, and never seeing our way clear of the debt. It will save us over $800.00 a month which we can then put into savings. Is this a good idea or not?

Gwen”

Dear Gwen,

I almost exclusively never think it is a good idea to cash out a 401(k) or 403(b) retirement account to pay off debt. Those funds are protected from creditors and if you cash them out, not only will you pay huge taxes and surrender fees, but you’ll never be able to get your savings back into the same position again. If you leave the funds there they will grow more than if you start savings all over again.

The reason there are such huge penalties to cash out one of these plans early is so you don’t do it.

Talk to a local bankruptcy attorney about maybe a chapter 13 bankruptcy that will allow you to repay what you can based on your new income. If you have no problems affording the minimum payments then consider talking to a debt management company to see if you can get your interest rates reduced.

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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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