Should you cash out your 401k to pay off debt?

cash out 401k

 

 

Should you pay off your debts by cashing in your 401k?

 

No!  You should not cash out your 401k, 403b, or any other retirement plan (like a Roth IRA) to pay off debt if you are under the age of 59 1/2.

 

First, if your employer matched your contributions, those funds would NOT be eligible for withdrawal. You can only withdraw the funds you invested.

 

When you make an early withdrawal from your retirement account, you are responsible to pay federal and state income taxes on the amount you take out.  You will also be responsible to pay a 10% penalty fee (or excise tax) on the amount of money you withdraw from your retirement account.  The percentage you will pay on taxes and penalties will be far higher than what you are paying in credit card interest.

 

Things you can do instead of cashing out your retirement account:

  • Negotiate your interest rate with your credit card company.
  • Make extra payments to reduce interest you are charged and to decrease the length of your loan.
  • Transfer your balances to lower interest credit cards.
  • Consolidate your loans to the lowest interest rate card or loan.
  • Get a second or side job to supplement your income.
  • Sell some items from your home.  A yard sale is a great way to earn some extra cash.
  • Cut unnecessary items from your budget.  (cable, landline phone, entertainment, eating out, etc.)
  • Use coupons to cut your grocery bill, and put the savings toward your debt.

 

By doing even a couple of things on the list will help you tremendously cut that debt.

 

If you did cash out your retirement, you lose a great investment for your future, at a time when working two jobs will be harder than doing it now!  Say you have $50,000 in your retirement account.  It can potentially earn $500,000 in 30 years just by leaving it alone.  This doesn’t even include any additional investments.  That is a potentially HUGE loss if you decide to cash it out now.

 

If you have any questions about your debt, please leave it below or contact us to help you get in the right direction.

 

You can read more about debt help here.

 

 

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Comments

  1. Hi there:) some companies allow you to become “vested” which means after a certain amount if time the money they contribute to your account is yours to do what you will and you can withdraw it early. Just thought I would share as we had to do this so that I could stay home with the kiddos:)