I am in credit card debt right now and would like to cash in an old 401K I have with a former employer. I understand I have about 12K in the account and could really use this money to get myself out of debt and close my credit cards. I know there are stiff penalties, but how can I make sure the penalties are taken out when I cash it in, prior to getting hit again when I file my tax returns in January?

I don't know if you can do that. I actually cashed in a 401k last year and they took quite a bit out for taxes but I still got hit when I filed my taxes this year. It was only $1800 in my 401k when I cashed it but the company I worked for was sold and I didn't want to roll it over into the new company. I think I only had about $100 penalty - give or take at tax time though. Of course since you have 12K it will be higher. Could you just set some of it aside so when you go to do your taxes you have money in case you have to pay in?

You'd be better off doing a loan from the 401(k) for the needed amount. That will give you 5 years to pay it back at a 5% interest rate. If you just take the money now, you are looking at $4800 in taxes and penalties. And, of course, that 12K is considered as income to you, so you may need to find out if it bumps you up into a new tax bracket.

If you decide to do this, make sure that the amount deducted is at least $4800, and I would probably put aside another 1,200, just in case there are additional amounts you need to pay at tax time.

And just so that you are aware of the long-term consequences, this handy calculator RolloverSystems: Take control of your financial future. Roll over your 401(k) to an IRA. will show you the potential earnings you will give up for the short term money. If you are young, you may be giving up nearly $100K to get that 6K. Just something to think about.