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I Am Permanently Disabled. Should I Take Money Out of My 401(k) to Pay My Credit Card? – Jeri

Jeri

“Dear Steve,

I’m a 51 yr old female on total disability, and will be for the rest of my life. I receive Social Security and Long Term Disability thru the company that I worked for. My question is this. I have a credit card that has a balance of $5900, and the promotion of that card is going to expire before I can pay that off…..with accrued finance charges of almost $2000.

Should I take money from my IRA, (which has only 51K) to pay it off before the promotion expires and that 2K is tacked onto my balance and then 25.99% APR. I do not have to pay any penalties for withdrawing, and because of my situation of income, probably not much in taxes, if any.

Thanks in advance

Jeri”

Dear Jeri,

Let me say this in very clear terms. If you take the money out of your 401(k) to pay this off I will personally come and kick your ass. 🙂

Your 401(k) is not a savings account. In fact taking money out of your retirement account comes with some serious penalties and taxes if you do it before you are legally eligible to do so.

That money right now is protected from your creditors and can’t be touched. So you’d be handing over money you’ve saved and will need to live on to address a bill that you can no longer pay due to circumstances beyond your control.

I truly do care about you and I am a compassionate soul but in this matter I need for you to not make a critical mistake that you will pay for when you are much older.

Leaving that money in your 401k will multiply it and turn it into much more. Let’s say that you leave that money alone and in 25 years it is now worth $15,000 as the stock market rebounds over time.

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So by draining that money now it will actually cost you $15,000 to pay off that card and what will you use to fill the $15,000 hole when you are disabled and 76?

If you don’t have any assets like equity or cash in the bank then one option may be to not pay the bill and do nothing. So let’s look at what happens in that approach.

If you do nothing you will wind up in collections. Debt collectors will call, you may be threatened with a lawsuit and/or sued by the creditor. If you don’t have any assets and you are living on LTD and SS then the creditor can’t garnish that money if they get a judgment against you.

Based on your situation I am not confident that you will not run into another unforeseen financial hurdle in the next five years. If you do, all your financial problems could be addressed with a bankruptcy. And even bankruptcy can’t touch your 401(k) money.

The debt feels emotionally strong and the pressure you are facing wants you to make a decision to address the emotional stress but you also need to consider your responsibility to protect and care for yourself by being a good guardian of the 401(k) money you have. Trust me, it is never enough.

Sincerly,
Steve

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.

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.

7 Comments

  • I recently became dissable for life, I can’t no longer b able to pay my 401k loan, I’m on ssdi and on a limited budget, can the rest of the loan b paid with the remeider of the money that’s on the 401k?

    • You should check with the 401(k) administrator to determine if your disability would qualify for a suspension of repayment. Also, ask if a suspension of repayment is approved, if it will result in tax liability.

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