Cash Out 401k to Pay Debt?
Chad should NOT cash out his 401k to pay off debt because 40% of it would go towards penalties and taxes.
QUESTION: Chad and his wife have $35,000 in debt between credit cards, student loans and car loans. They bring home $150,000 a year. They also have $25,000 in their 401-K savings. He wants to jump-start their debt snowball. Should they use that money to eliminate their debt?
ANSWER: You should not take the money from your 401-K to eliminate your debt because $14,000 will go to penalties and taxes – that’s 40% of your savings. It’s like taking out a loan with 40% interest to pay off your debt. That’s a bad plan.
Live on less for one year, get on a written budget, and you can have it all paid off in less than a year.
I would never cash out retirement savings to pay off debt unless it is to avoid foreclosure.