401K cashing out

BaaRamEwe · #1 (**permalink**) 04-22-2007, 09:45 PM

Hi,

I am a 27 year old stay at home mom to 8 month old twins. I am thinking that to free up some cash each month that maybe it would be wise to cash out my 401k to pay off my 2 credit cards. I have approx $5000 in 401k. I have 2 credit cards. Card #1 balance of $3200.00 interest rate of 14.9% min payment of $75.00 Card # 2 balance of $1400.00 interest rate of 17.9% min payment of $30.00. I generally try to pay about $5 more than min a month on each card. What I am wondering is if the penalties for taking my 401k is less than the interest I will pay if I continue to pay on these cards. Would this be a good move? My husband makes between $50,000-$60,000 per year. I live in Salt Lake City, Utah. Could you please help me with the pros and cons of this decision. I don't think I could get a credit card with a 0% interest rate to transfer the balance to, plus I don't really want a bunch of people pulling my credit as we are thinking of refinancing in the next few months.

Any advice would be greatly appreciated.

Mark A · #2 (**permalink**) 04-22-2007, 11:01 PM

First, don't use your cards anymore. Many times people pay them off with a consolidation loan and then run them right back up again. Pay as much as you can towards the smaller one each month until it's paid off, then move that payment plus the minimum for the larger one all towards the larger one.

Don't touch your 401k unless it's a life or death emergency, or you are moving it into a more profitable venture, it's there to grow not to shrink.

PiscesGirl · #3 (**permalink**) 04-23-2007, 10:42 AM

Quote:

Originally Posted by BaaRamEwe

Hi,

I am a 27 year old stay at home mom to 8 month old twins. I am thinking that to free up some cash each month that maybe it would be wise to cash out my 401k to pay off my 2 credit cards. I have approx $5000 in 401k. I have 2 credit cards. Card #1 balance of $3200.00 interest rate of 14.9% min payment of $75.00 Card # 2 balance of $1400.00 interest rate of 17.9% min payment of $30.00. I generally try to pay about $5 more than min a month on each card. What I am wondering is if the penalties for taking my 401k is less than the interest I will pay if I continue to pay on these cards. Would this be a good move? My husband makes between $50,000-$60,000 per year. I live in Salt Lake City, Utah. Could you please help me with the pros and cons of this decision. I don't think I could get a credit card with a 0% interest rate to transfer the balance to, plus I don't really want a bunch of people pulling my credit as we are thinking of refinancing in the next few months.

Any advice would be greatly appreciated.

I agree, never cash out those retirement plans unless it is an emergency. All you have here is some pain. Get into a monthly debt reduction program. You can actually have it taken out of your pay check automatically. Stop increasing the debt. Then focus on increasing income. When you concentrate too hard on debt, you will attract more debt. So concentrate on something positive like making income and you will be surprise on how it will be attracted to you. If you own your home, you can get a home equity line of credit to pay off that debt and then the interest in tax deductible. HOwever, you want to still try and pay off the line of credit. It's only suppose to be a temporary fix, not a false sense of security like some people have done and are now in trouble. Good luck

tater03 · #4 (**permalink**) 04-23-2007, 01:33 PM

I would advice againest doing it also. If you do decide to make sure you have the taxes taken out though. I don't know that much about it but I just know a friend of mine got socked with the taxes at the end of the year and I want to say there is a penality to if you are not paying it back?

Mynion · #5 (**permalink**) 05-16-2007, 05:06 PM

Let's do some basic math...

Your 401k has $5k in it, so your IRS penalty would be $500 (10%). The penalty is not due until tax time. You would also owe taxes (not a big deal, you have to pay them sometime). 20% will be withheld, leaving $4000 to pay off your cards (which isn't enough to pay off the credit cards entirely anyway).

You also have the lost opportunity cost of your $5k earning a growth rate of let's say 8% after-tax. So that is another $400-$500.

So, if you are going to pay more than $1000 in interest over the next year, then it's simply not worth it.

If you made no payments on your CC's, you'd accrue around $730 in interest charges this year.

So you should try another way to pay off your CC's and leave your 401k alone. And btw, do not ever use a 401k loan, it's worse than a credit card (you pay a 401k loan back with after-tax dollars, so you have your tax rate PLUS the interest rate).

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