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I Almost Can’t Resist Draining my 401(k) to Payoff My Credit Card Debt. – Blake

Blake

“Dear Steve,

mortgage: $193,000 ($1556.40 payment)
Car: $25,000 ($600.00 payment)
Combined Credit Card and Bank Credit Line: $18,600.00
Salary: $75,000

I am only 29 (30 in December) and am having a hard time resisting the urge to take out the $15,000 dollars in my rollover IRA (401k from previous employer) to pay off the majority of my CC and CL. I know you advise against taking out 401k but I am single and have no dependents and the allure of being able to pay down my credit line to around $5k is extremely attractive. I could take the payments I am making at this time and apply it to the remaining credit balance (after the 401k payoff) and have that paid off extremely fast. I have already started building the 401k retirement plan at my new job…and have plenty of time to increase it exponentially in the next 30 years before I retire.

What other options do you recommend to ward off the attractiveness of paying off all that debt?

Blake”

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Dear Blake,

I understand the allure but this isn’t savings money or emergency fund money we are playing with here. This is protected cash that is growing for your retirement and is heavily penalized if you withdraw it.

I will guarantee you that if you take the money out now that you will never be able to get back into the same retirement position. Let’s say you took out $15,000 and wound up with $10,500 after taxes and penalties. Based on what it looks like the stock market is going to do as the economy recovers if you were to replace these funds within the next five years, at a 5% growth rate, you’d have to reinvest $19,144 PLUS on top of that you’d have to invest what you normally would have to get yourself back to the same account position. And in my calculation I didn’t even factor in repaying yourself with inflated dollars. The actually replacement amount is even higher than $19,144!

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Imagine this, you are 75 and now looking back to give yourself advice, do you think you’ll have so much money saved for retirement that you’d tell yourself to take it out or would you rather have more money saved for those years when you can’t earn any?

I understand the urge, don’t do it.

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




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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