Say you are 53 years old, have a salary deferral of 5% to 401K, only have 60k in your 401K, have hugh debt and already have a 401k loan that comes out of your paycheck at 200 every two weeks. Would it be that bad to take an early withdrawal of $35K, pay taxes and penalty, pay off ALL debt including 401k loan and then increase salary deferral to 15%?

Well, to begin with, you pay the 10% Early Withdrawal Penalty. That's $3,500.

Then the $35,000 is taxed by the federal government at between 15 - 25%. That's at least $5,250 and as much as $8,750.

Then the $35,000 is taxed by the STATE government from 3% to 10%, which is $1,000 to $3,500.

So you end up paying between $9,750 to $15,750 in taxes.

How much is the debt, and rate of interest are you paying on it?

It sounds like you are still an active emplyee at the company where this 401(k) plan is located - right? If so, it's unlikely that your company's plan would allow you to take a withdrawal for the purposes you mention. So this is probably a moot question.

Secondly - what's the problem with continuing to pay the loan back at $200 every two weeks? You mention that you could increase your contribution rate to 15% of salary - so it seems that the current 5% isn't killing you fiancially. I just don't get what problem you're trying to solve here.

ebaines:

Actually, it probably has to do with the fact that all of the credit card companies have jacked up the annual interest rates to 28 - 35%, making it appear advantageous to get the balances paid off.