| Withdraw 401K to payoff credit cards? |
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ntlord13
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Joined: 13 Feb 2006
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| Withdraw 401K to payoff credit cards? |
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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!
Jake
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Mon Feb 13, 2006 1:55 am |
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rockhound
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Location: West Virginia
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| 401(k) |
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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.
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Mon Feb 13, 2006 2:52 am |
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ntlord13
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| 401k |
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LOL - great analogy rockhound. I appreciate the feedback, and I believe you are spot on. I just wanted to make sure this wasn't a move I overlooked since (obviously) I am not a money guru. I will hunker down and pay this CC off without touching my 401k.
One last question, do you recommend I stop contributing to my 401k and take that money and put it towards the credit card debt?
Thanks!
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Mon Feb 13, 2006 3:18 am |
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kristinecfp
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| 401K to payoff cc debt |
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Jake - some more information would be helpful in answering your questions. What rate are you paying on the credit cards? What is your credit score? Can you transfer some or all of your debt to a lower rate card to reduce interest costs while you are paying down the debt (only recommend doing this once or twice - too often can have a negative effect on your credit score)? How much are you contributing to your 401K? Does your company provide a match and are you contributing enough to get that match?
Having asked a ton of questions, I will say that I agree with rockhound that borrowing from your 401K should be a last resort. I also believe that stopping your 401K contributions to pay off your cc debt should also be a last resort (although reducing your 401K contributions might be a temporary solution).
If you stopped your 401K contribution, how long would it take to pay off your cc debt and restart your 401K contributions? Can you afford to not contribute to your retirement for however long that might be? And once you got used to NOT contributing to your 401K would you restart the contributions when your cc debt is gone?
Instead, like rockhound suggested, I would recommend looking for other sources of money to pay off your credit card debt. Can you reduce spending in any areas? Do you have any opportunities to increase your income (overtime, part time job, etc.)? Depending on your answers to the questions above, in most cases I would advise against stopping your 401K contributions and do everything possible to find other ways to pay down the cc debt.
Good luck...
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Mon Feb 13, 2006 4:36 am |
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Jaszbo
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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.
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Mon Feb 13, 2006 1:34 pm |
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sam1000
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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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Tue Feb 14, 2006 2:07 am |
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timjfisher
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| Never! |
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I totally agree. Never a good idea.
"Do the math" I always say. There are some great financial calculators here:
http://www.dinkytown.net/financialcalculators.html
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Sat Feb 25, 2006 7:18 pm |
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