I am seeking advise/opinions on the wisdom of clearing up approximately $50,000 worth of credit card and loan debt with a withdrawl from my 401-K. I am 48 years old and have approximately $300,000 in my 401-K. The economy in the recent years has zapped my income and has made it impossible to pay much of my debt. I am getting weary of the calls from the credit card companies, but I know what the ramifications are of taking a withdrawl from my retirement account (penalty, tax's and loss of future savings). Any advise or opinions?

I would attempt to find another way to pay off the cc debt rather than using the 401(k) and here's why... there's a 10 % penalty right off the bat since you are less than 59 1/2 yrs old and then the $50,000 you take out of the plan is treated as earned income and therefore you will pay taxes on it just as though you "earned" it. If your tax bracket is say 25 %, that's another $ 12,500 penalty... thus your net cost would be about $ 17,500 to make the withdrawal. Granted credit card debt is bad debt but see if you can find another way to pay off the cards such as 1) cutting expenses and applying what you save there to the debt 2) calling the card companies and asking for a lower interest rate 3) selling items that you do not need and applying the proceeds to the debts 4) a part time job and applying the income to the debts. Also, see if the plan provisions will allow a "loan" rather than taking out proceeds, then set up a plan to pay the loan back.

I paid off most of my debts with a loan from my 401k, the payments plus the interest went directly to my account, except for the $50 dollar transaction fee. See your administrator of your plan to see if you have such an option.

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Originally Posted by smills

I am seeking advise/opinions on the wisdom of clearing up approximately $50,000 worth of credit card and loan debt with a withdrawl from my 401-K. I am 48 years old and have approximately $300,000 in my 401-K. The economy in the recent years has zapped my income and has made it impossible to pay much of my debt. I am getting weary of the calls from the credit card companies, but I know what the ramifications are of taking a withdrawl from my retirement account (penalty, tax's and loss of future savings). Any advise or opinions?

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As you may know, You will be taxed about 40% on the cash out. This is equivalent to taking out a loan at 40%! You have 60 days to reinvest your money.. by calling your employers human resource dept...

And if you don't change the habits that got you here in the first place, you will be back in the same situation again... minus your $50k...

I'm in my early forties, and I took out a big chunk of my 401k in 2003... which I regret to this day. I worked 21 years for that money, and most of it's gone now.

All your answers are the same ones I would give, so my thoughts and beliefs are confirmed. Just needed to hear it I guess. Always had above average income and never had any credit problems, but as I mentioned the rug got pulled out from underneath me (and many others in my industry) in the last couple years, with the midwest economy (Michigan) and the real estate bubble, etc... Thanks much for the input and it's back to work in an effort to pay off the debt rather than borrow against the 401-K.

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Originally Posted by smills

Thanks much for the input and it's back to work in an effort to pay off the debt rather than borrow against the 401-K.

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Whoa, you apparently didn't read the advise carefully. What you were advised is that the costs of WITHDRAWING funds from your 401K are too great to justify a WITHDRAWAL.

What you were advised to do was see if you can take a LOAN against the money. Most 401Ks have a loan provision. Generally the interest rates will be low but the interest also goes back into your account. So the total amount of your payment goes back into your 401K. Essentially you are borrowing money from yourself and paying yourself interest.

A 401K loan is a valid alternative. Contact your plan admin, see if the monthly payment on such a loan would be less than the sum of credit card payments you pay now. It probably will be.