Why Cashing Out Early Is Bad

Patty's husband is itching to be debt free, but the way he wants to make it happen strikes a sour note with Dave.

QUESTION: Patty’s husband is a salesman who drives a lot. They have never carried debt and have $80,000 left on their house. He wants to get it paid off. They have some money in their retirement that they can cash out. Should they do that?

ANSWER: I want you out of debt very badly, but DO NOT take money from retirement. If you take it out, they’ll charge you a 10% penalty plus the tax rate, so that will be about 40% of the money. That’s like borrowing money at 40% interest, and the answer to that is no. It’s good that you both want out of debt, but that’s cutting off your nose despite your face.