Should I cash out my 401k to pay off credit card debt?

Question

I'm 27 years old and $8,000 in debt due to using a credit card to support me over the months I was out of work. The credit card is pretty high interest and its becoming very aggravating to pay and want to be debt free as much as possible. I have a $9,000 401k through my employer. I know I will be hit with taxes and probably only get about 40% from the 401k but I'd really like to have the cash to help put towards getting rid of the high interest payments I make each month on the credit card. It won't wipe out the debt completely but would go a long way. Any thoughts would be greatly appreciated.

Answer 1

Have you considered taking a loan from your 401k instead?  Many plans allow you to take out a loan equal to 50% of your vested balance and the interest on the 401k loan will usually be less than the interest on a credit card.  Plus, you will be paying your 401k back each month instead of the credit card company.  And in this stock market, that could be the best investment in your 401k.  And with a loan you will not incur taxes and the penalty for early withdrawal, unless you leave your job.

the downside is that some employers will not allow you to contribute to the 401k when you have an outstanding loan.  Some plans even keep you out of the plan for a period of time after the loan is paid.  If you get a company match and can no longer contribute that could be bad, but that's something you have to weigh against the burden of the credit card balance.

other alternatives is to find a zero % card and roll the balance, but pay it off before the intro rate expires.

Answer 2

No, don't do it.  Negotiate with the credit card companies to get lower interest rates, or find cards with lower interest rates and switch.  Sell some stuff, cut expenses, find a roommate, get a job and a second job, but don't dip into your 401K.  Besides the taxes, you won't learn the key lesson, which is how to live on less and save more.  Each dollar in your 401K can grow tax free if you keep it there.  At 27, your money can double many times over: if you make just 10%, it will double roughly every seven years.  (Look up "The Rule of 72.")  If you keep $9,000 in your 401(k), then by age 55 you could have $144,000!  So, figure out other ways to get out of debt: check out www.daveramsey.com and www.dolans.com.

Answer 3

if u have a wife you can give her a present of up to 30 grand with no taxes.

get a loan  with a place that has a lower interest rate than ur bank and see if u can pay that off.

dont cash that check, u might regret it, or jus think out all other possibilities first

Answer 4

look up suze orman.  you got to hit up someone who can lend it, intrest free.  401 is for retirement, not an emergency fund.  hit up parents, aunt, grandma. good luck, it sucks, i know

Answer 5

id say yes...only cause if you put it off and put it off and maybe even alittle more put off lol it'ss eventually come back to bite you in the ***. and itll hit hard and youll be ****** lol

Answer 6

Not worth it. You'll have to pay yourself back. Cut up the card and start paying it off in as big of chunks that you can. Or find a low interest card, roll over to that, or go to your bank and work out a deal to help pay off your debt. If you do the card, last resort, don't ever be late. Bank deal better. If that is not good, then join a credit union. Research your options.

Answer 7

How is your credit rating? Income? If both are good and you can get a personal loan at a reasonable and fixed interest rate then I would recommend applying for a personal loan and using it to pay off the credit card. Rolling over debt from one credit card to another isn't really a good solution. Even if the card comes with a 0% balance transfer option, the grace period on that 0% interest rate is going to have an expiration date and you'll eventually find yourself back in the same situation that you were before. Borrowing money from friends and relatives is also not a good idea. Eventually they are going to expect you to pay that money back, and if you're struggling to pay what you owe now you will have problems scraping the cash together to pay them back as well. I'm sure I don't need to tell you that money is a major factor in the destruction of many friendships and family relationships.

Dipping into your 401k funds is always a bad idea, and it is something that you should do only in a dire emergency and as an absolute LAST resort. Money that you pay into a 401k is not taxed, but if you pull any of that money out you will have to pay it back from taxed income and with interest. Worse still, is that if you don't pay it back within the time allowed by the IRS you will get slapped with a hefty tax penalty. Essentially, you would be making yourself a lot poorer. Do you really want to give all your hard earned money to the government?

I think you just have to accept that getting into credit card debt was a choice you had to make because of the financial situation you were in. Thats ok. Everybody goes through bad times. An eight thousand dollar credit card debt is a lot but its doable. If you're not in a position to get a personal loan then try my suggestion that follows. Its one that I've used to help many friends get out of major debt.

I call it 'dimming' because it means that you would have to dim down certain aspects of your life over a very specific period of time during which you'll be paying off what you owe.    If you're not married and don't have any children to support it works even better. Dimming means that you have to cut back on everything on which you're now spending money that you don't have to spend. Get out a piece of paper and a pen and write down your total income for a month on the left side. Then make a list of all the things you spend money on on the right side. Then begin to eliminate, one by one, all the non-essentials from the list on the right side. When your list is done it should include only things like food, rent (or mortgage), utilities, car note, gas, etc. If you have anything like clothes, entertainment (including premium cable TV channels), cell phones, alcohol, tobacco products, etc. they should ALL be eliminated from your list. Make up your mind to keep wearing the same clothes that you have in your closet right now, and if you think seriously about it, you can live without most of the things on this list. Whatever you're paying into your 401k each pay period, stop it for now and divert the funds into your debt repayment plan. The 401k money isn't going anywhere. You can always start making contributions to it again later, and you won't have any government penalties to deal with as long as you don't try to take any of the money out. If you're used to eating out a lot or hanging out in bars with friends, stop that, too. Buy your groceries in bulk at a discount retailer or wholesaler once a month, prepare all your meals at home, and take lunch to work with you every day. If you drive a car, leave it at home and take the bus or train. You will save a lot of money on gas alone. This isn't to say that you can't take a girlfriend out to dinner once in a while, but you can always do this without blowing wads of cash at expensive restaurants or on expensive gifts.

If you do this for several months you will be surprised at how much money you can save. Do it for a whole year and you will be SHOCKED at the savings. Use every dollar that you save to pay down the credit card debt. If you can rustle up at least  $300 in savings every 2 weeks, that's $600 per month. In a year, that adds up to $7,200. Consider taking on a second (part-time) job and using all the income from it to pay towards the credit card debt. If you can pull in at least an extra $100 to $150 a week from a part-time job, that's another $7,800 over a year. If you use all of these monies to keep sending in payments on that credit card debt, you would be able to knock it off completely (including the interest) in about 8 or 9 months, and you'll have even some savings left over. And after that you can resume your 401k contributions. You will be surprised to find that once you get into the habit of saving, you can come up with very creative ways to keep doing it.

This is something that you should seriously consider doing for yourself. Its about you and your financial future, and going on a cash diet for several months is a very small price to pay for becoming debt-free. Do it for yourself. You're going to be very happy with the outcome later on.

And as for that credit card, don't cut it up and throw it away. Take it out of your wallet, use a red marker and draw a big red 'X' across it and place it in a drawer. Every time you are tempted to spend money, take out that credit card and look at it. Let it be a reminder of how you got into this mess in the first place, and use it as a motivator to stick to your plan. And in future (after you've paid off the debt) do not use credit cards to buy anything that you can't pay off completely in 3 billing cycles or less. The reason so many people get trapped in credit card debt is because they use the cards to make a little purchase here and a little purchase there, and because the amounts are small they think they can manage it and that they will be able to pay it off. But, those small amounts quickly add up, and a new round of interest charges get piled on top of it every billing cycle so a few hundred dollars can easily grow to over a thousand. If you're making only minimal payments each month you will never pay it off---and that's exactly what the banks are counting on because thats how they make their money!

Answer 8

O.k. you need ro read the Suze Orman book.  She has great advice about why you shouldn't take money out of your 401K.  There is different ways of handeling these high interest credit cards.  I'm dead serious she has a great book called "The Money Book, For The Young,  Fabulous, and Broke.  This book is awsome.