[Deanstar]

My wife and I have run up a pretty big credit card bill ($90K). Long story but suffice to say we are working to a budget now and have about $1K a month to put to that debt. However, our payments total $2.2K. So we are underwater at present. However, I do have $140K in my 401K, fully vested, no loans. I know if I withdraw the 401K money I pay not only current taxes (federal & state) but also a 10% penalty. Does it make more sense to pull the 401K funds out, take the hit and pay off the credit cards? We will avoid the interest payments on the credit card debt. We have the option of a negotiated repayment plan with about $20K in interest over shorter life of the payments (48 months). Or we go the standard payments with the CC companies and we pay ~$90K in interest across the payment period of 84 months. I know I need a serious tax advisor on this and am in the process of finding one. However, I'd like to compare their advice against any ideas I receive here.

Thanks for any input you might have!

Debtor

[ScottGem]

The tax bite and penalty will be a big hit. If the interest rate on the debt is not huge, then paying them off will cost you less than the bite from your 401K.

What you might consider is a 401K loan. Run the Loan scenario by your admins. See what your payments would be on a loan. You might be able to get a loan for much less than the $2.2K per month. And the interest you pay on that loan is placed back in your account, so you are just paying it to yourself.

[Deanstar]

Scott,
Good advice. I'd been looking at this site for other similar questions and saw that brought up, as well. I will review that option with our admin.

Thanks,
Dean

[ebaines]

You will probably find that the maximum loan you can take from the 401(k) is 50% of your balance, or $70K. As for taking a withdrawal - your $140K balance may not be enough to fully pay off the $90K credit card balance - figure 28% for federal tax, $10% for penalty, and 5% (just a guess) for state income tax, and that leaves you with only 57% left over, or about $80K. Also, check with your plan administrator as to whether in-service withdrawals are even nallowed - many plans do not allow active employees to withdraw funds except through the loan provision.

[I wish]

Yes, the interest rate is very low right now, so borrow as much as you can from the bank to pay off your loans. It will definitely have a lower interest rate than your credit card interest rates.

The other thing you can do is transfer your credit card and its debt to a different credit card (within the same company) that has a lower interest rate.

And then if you really want you can still withdraw some money, pay the taxes and penalties, and cover the rest of your debts.