Currently have about 120k in my 401, but I also recently accumulated 45k credit card debt (had 0% APR for two years, and those two years are up) and will now have to pay about $550 in finance charges starting next month.
Since I will be switching companies, I am going to rollover my 401K into an IRA. I was considered taking 45k out of my 120k to pay off the Credit Card debt.
I understand that their is a severe penalty for taking money out prematurely, but at the same time I am not looking forward to paying 550/month in finance charges.
I cannot refinance my house either, because I owe 350k on a house now worth about 325k.
Also, I was unable to get a personal loan from the bank because of my 640 credit score.
Not sure what I am going to do, but I am leaning on paying off the credit card debt.
Thanks!
Is Paying Off Credit Card Debt With 401k Smart?
by admin on December 9, 2009
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{ 6 comments… read them below or add one }
$45,000 in credit card debt.
+ 30% income tax
+10 % penalty
= $64,500 to pay off credit card debt.
Over the next 25 years at 8% growth that money would come to $ 473,441
Do you really want to take $473,000 out of your retirement to pay off a $45,000 credit card debt?
Don’t do it. You’re going to have to take out around $70K of your IRA to pay off the $45K. That is just wasting too much $. Also, if worse comes to worse and you have to declare bankruptcy, your 401K and IRA can’t be taken away from you. That’s why almost all financial advisors say to avoid taking out of your retirement accounts if at all possible. What I would do is look for other credit cards to transfer the balances to (maybe at more 0% promotional rates) or call your credit card company and see if they will lower their interest rate.
Just be aware that you will have to withdraw approximately $90K to pay off your debt as you will have to pay a 10% penalty on the withdrawal as well as income taxes.
I understand your concern about the monthly interest charges but you should consider how long it will take you to pay off that debt first.
Good luck.
Hi,
I used “Credit Solution” to settle my debt and avoid bankruptcy.They managed to reduce my debt up to 58%.It’s legitimate.I came across this company on NBC News Special Edition.Check it out here:http://d6b0.easyurl.net
Borrowing form a 401k should be a last resort however in your case I think you have exhausted your options. Personal loans are often small denominations (15k) and at high interest rates so using them for credit card debt is often a bad choice. As for just trying ot pay off the credit cards, $550 a month in non tax deductible interest is hard and sinc eyour home is tapped out of equity I would say take that 401k and pay it all off. The key is then NOT to rack up an addiitonal debts. Cut up all but one credit card and use it as needed but pay it off when the bill comes in. If you currently live on your credit cards then using your 401k to pay it all off is a band aid. I suggest working out a strict budget to get you back on track once the debt is clear. Good luck.
Gene,
Tough situation. But before diving into 401k funds, you should explore all other options.
There’s a good article at eHow on steps to take to begin tackling your debt. Take a look at it:http://www.ehow.com/how_2326032_avoid-es…
How to Stop Escalating Debt
It includes information on companies that can help you with debt consolidation and reduction.
You can also look here for tips on earning some extra cash online:http://www.ehow.com/how_2254361_money-in…
How to make money on the internet, scam-free
Lastly, here’s an interesting alternative to conventional lending…getting a “social networking” loan from Virgin Money (from the same folks who run Virgin Airlines):http://www.ehow.com/how_2310995_student-…
Social Loans from Virgin Money
Hope these help.