[jturner]

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%?

[AtlantaTaxExpert]

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?

[ebaines]

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.

[AtlantaTaxExpert]

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.