401k and credit card debt

401k and credit card debt
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#1

Hello,

I receive notice from my previous employer of the balance of my 401k that I have yet to roll over.

My question is would it be a good idea to cash out the lump sum to payoff debt?

Background: I went from full time to part time and now make about $35k and owe close to $15k and the lump sum after 10% penalty, fee and taxes would be around $10k.

Thank you


#2

Hello, and welcome! It can be really tempting to cash out your retirement fund to pay down debt, but it’s an expensive way to go. Losing one quarter to one half of the withdrawal to taxes and penalties is bad enough. The long-term cost is a lot higher, though, because that money is no longer earning tax-deferred returns for you. If you’re in your 30s, every thousand dollars you withdraw means $10,000 less when you reach retirement age. If you’re in your 20s, that cost effectively doubles to about $20,000. Sometimes you have to break into your retirement funds for true emergencies, but there are other, better ways to deal with debt.

Here’s a good place to start:

https://www.nerdwallet.com/blog/pay-off-debt/

if you have any questions about how to go about this, please post them here. We love to help people get their finances in shape!