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big$saver · 07-19-2006, 09:36 PM

Hello,

I was wondering if it would be a finacially sound move to withdraw a portion of my 401k to payoff some of my credit card debt? I currently have around 18k worth of debt that I could get rid of...but at the determent of reducing my 401k to do it and I only have around 43k in my 401k currently. Does it make sense to do this or should I continue to pay on the credit cards and pay the banks interest?

Thanks!

bill_gatez · 07-19-2006, 09:37 PM

While it may seem expedient to borrow money to pay off credit card debt, touching that 401(k) should probably be an absolute last resort because it can be difficult to replace and is like robbing your future. Unless you are actually in danger of being thrown out into the street next month for missing a payment, my suggestion would be to cut other costs and find another way to wipe out that debt. If you have multiple cards, it would be advisable to transfer some to those with a lower APR, and then cancel the old cards. Also concentrate on paying off the cards with the lowest balance, and then cancel those accounts. This is a strategy to get yourself away from using credit cards, which presents the other danger of borrowing from you 401(k): what if you cut your 401(k) money in half to pay off the cards and then continue racking up debt? It will have been for nothing. You may have to pay the banks interest for a while, which is what you agreed to do when accepting the card, but you should go all out to pay off the balances and never again carry a balance. With $18,000 in credit card debt, you may also need to consider an entire change in thinking about the use of money and credit. I have compared having a credit card to handling a loaded gun, but that may be an insult to guns. In both cases, you have to have absolute respect for them, and exercise extreme caution.

BOB+ · 07-19-2006, 09:38 PM

If you are really bad in credit card debit it's recommended to at least do your 401k plan up to matching.
I would transfer all your credit cards into one credit card with zero intrest for a year and zero on any transfers, so that it will at least not make money on you and you have a year to pay it off.

Learn from your mistake is more important than anything else, if not you'll be at the same spot in a few years.

DrTrade · 07-19-2006, 09:39 PM

I would agree with the others that responded to your question. I would borrow from the 401K only if you were in very dire straits financially. Also, like Jaszbo said if you wanted to drop your contribution, at least keep it to where your employer matches.

My Thrift Savings balance was not that great when I borrowed from it a couple of years ago. I was 44 years old and had never owned a home. My wife and I found some property that was basically raw desert. We live in an area where we might get ten inches of rain a year and the property was outside of the city.

I borrowed the money to drill a water well....almost 20K. At the time, I felt I had two options. The first was to borrow the money and get in the house and start paying the mortgage. The second was to wait a year or two, pay for the well and site preparation, and then buy the house. I would have chosen the latter if I was younger, but I felt it was more important to have the house paid for when I retire. I knew by borrowing the money it was taking away from my future, but by not having a house note when I retire, it would hopefully make retirement a little less stressful.

saver · 07-19-2006, 09:45 PM

If you withdraw from your 401k you're going to have to pay a 10% penalty plus ordinary income tax...probably in a higher tax bracket since it will be income in addition to your salary. That is probably going to cost you way more than interest on your credit cards.

If you take a loan on your 401k then you're volunteering for double taxation since you have to replace the funds with after tax dollars AND you will pay taxes again when you withdraw those same funds at retirement... both situations make ABSOLUTELY no financial sense whatsoever. Don't do it.

07-19-2006, 09:36 PM	#1
big$saver Piggy Bank Join Date: Jul 2006 Posts: 59 Rep Power: 6	Withdraw from 401k to pay off the debt. Is it a good idea? Hello, I was wondering if it would be a finacially sound move to withdraw a portion of my 401k to payoff some of my credit card debt? I currently have around 18k worth of debt that I could get rid of...but at the determent of reducing my 401k to do it and I only have around 43k in my 401k currently. Does it make sense to do this or should I continue to pay on the credit cards and pay the banks interest? Thanks!

07-19-2006, 09:37 PM	#2
bill_gatez Savings Advisor Join Date: Jul 2006 Posts: 132 Rep Power: 6	While it may seem expedient to borrow money to pay off credit card debt, touching that 401(k) should probably be an absolute last resort because it can be difficult to replace and is like robbing your future. Unless you are actually in danger of being thrown out into the street next month for missing a payment, my suggestion would be to cut other costs and find another way to wipe out that debt. If you have multiple cards, it would be advisable to transfer some to those with a lower APR, and then cancel the old cards. Also concentrate on paying off the cards with the lowest balance, and then cancel those accounts. This is a strategy to get yourself away from using credit cards, which presents the other danger of borrowing from you 401(k): what if you cut your 401(k) money in half to pay off the cards and then continue racking up debt? It will have been for nothing. You may have to pay the banks interest for a while, which is what you agreed to do when accepting the card, but you should go all out to pay off the balances and never again carry a balance. With $18,000 in credit card debt, you may also need to consider an entire change in thinking about the use of money and credit. I have compared having a credit card to handling a loaded gun, but that may be an insult to guns. In both cases, you have to have absolute respect for them, and exercise extreme caution.

07-19-2006, 09:38 PM	#3
BOB+ Piggy Bank Join Date: Jul 2006 Posts: 96 Rep Power: 6	If you are really bad in credit card debit it's recommended to at least do your 401k plan up to matching. I would transfer all your credit cards into one credit card with zero intrest for a year and zero on any transfers, so that it will at least not make money on you and you have a year to pay it off. Learn from your mistake is more important than anything else, if not you'll be at the same spot in a few years.

07-19-2006, 09:39 PM	#4
DrTrade Greenhorn Join Date: Jul 2006 Posts: 35 Rep Power: 6	I would agree with the others that responded to your question. I would borrow from the 401K only if you were in very dire straits financially. Also, like Jaszbo said if you wanted to drop your contribution, at least keep it to where your employer matches. My Thrift Savings balance was not that great when I borrowed from it a couple of years ago. I was 44 years old and had never owned a home. My wife and I found some property that was basically raw desert. We live in an area where we might get ten inches of rain a year and the property was outside of the city. I borrowed the money to drill a water well....almost 20K. At the time, I felt I had two options. The first was to borrow the money and get in the house and start paying the mortgage. The second was to wait a year or two, pay for the well and site preparation, and then buy the house. I would have chosen the latter if I was younger, but I felt it was more important to have the house paid for when I retire. I knew by borrowing the money it was taking away from my future, but by not having a house note when I retire, it would hopefully make retirement a little less stressful.

07-19-2006, 09:45 PM	#5
saver Greenhorn Join Date: Jun 2006 Posts: 34 Rep Power: 6	If you withdraw from your 401k you're going to have to pay a 10% penalty plus ordinary income tax...probably in a higher tax bracket since it will be income in addition to your salary. That is probably going to cost you way more than interest on your credit cards. If you take a loan on your 401k then you're volunteering for double taxation since you have to replace the funds with after tax dollars AND you will pay taxes again when you withdraw those same funds at retirement... both situations make ABSOLUTELY no financial sense whatsoever. Don't do it.

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