Is There Really No Penalty?

Beth and her husband are able to take money from their 401k to pay on their credit card debt. Should they do it if they think there's no tax penalty?

QUESTION: Beth is 47 and her husband is 61. They will be retiring in 5 years and are trying to get debt free. What are Dave’s thought’s on taking out 401k money to pay on their $30,000 in credit card debt if there is no penalty? They make $150,000 and he has $100,000 in the 401k. They have 2 kids who are back to living at home.

ANSWER: If you make that much money, why can’t you pay off $30,000 really fast? If you cash out 401k money, you get hit with the tax rate, which will be about 33%. That’s like saying you want to pay off the credit cards with a 33% loan. I wouldn’t do that.

If you are fired up and want to get out of debt, the credit card debt should be gone in a year. Live on $120,000 for a year and be debt free. I’m going to get unbelievably intense to pay this off instead of giving the government a third of what I have in retirement. Besides, the market is down, so it would be the wrong time to cash out.