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    Leeloo42's Avatar
    Leeloo42 Posts: 1, Reputation: 1
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    #1

    Sep 25, 2010, 02:51 PM
    Debate over using distribution to pay off debt.
    I have recently loss my job due to illness and have been approved fro SSDI. Over the past 20 years I had perfect credit. Due to illness and loss of income I have not been able to pay my creditor. When looking at the interest and late fees that are piling up, I would think I would be better off withdrawing from my 401K to pay my debt and restore credit. I would not be subject to the 10% penalty due to being approved for disability. The distribution and income earned will still place me under the 25% tax bracket. I will also be able to file as a qualifying widower with a dependent child, and qualify for a disability deduction. When considering the taxes I will have to pay on the distribution vs. the interest and late fees on my credit cards. I makes sense to withdraw the $25,000.00 to pay of the debt, and rollover the remaining amount. If I don't the credit cards companies will bleed me for the next ten years. Money is Money. In the event I am able to return to work, I would like a prospective employer to see that I am credit worthy. In addition, being debt free would allow me to contribute money to my retirement. Instead of seeing my money go to interest on credit cards and the balance never going down.
    ebaines's Avatar
    ebaines Posts: 12,131, Reputation: 1307
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    #2

    Sep 27, 2010, 06:50 AM

    Hello Leeloo42. Assuming that you are taking steps to avoid going into debt on your credit cards in the future, I would agree that paying taxes on a 401(k) distribution now versus later probably makes sense in your case. Given that you will have to pay taxes on the account sooner or later anyway, the real penalty in taking the withdrawals is the loss of continued tax-deferred growth in the account. If the interest rate on your credit card debt is higher than about 8% or so I would absolutely agree that reducing your debt - or better yet eliminating it - is the best course.
    excon's Avatar
    excon Posts: 21,482, Reputation: 2992
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    #3

    Sep 27, 2010, 06:59 AM
    Quote Originally Posted by Leeloo42 View Post
    In the event I am able to return to work, I would like a prospective employer to see that I am credit worthy.
    Hello L:

    Paying off the debt WON'T return your credit history to it's previous pristine state. THAT is going to take 7 years.

    excon
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