My 401k is at $33k. I am looking to take out $12k to pay of some debt. Is this a good or bad Idea?

Answer 1

As long as you are putting the maximum in. It is never a good idea to dip into your retirement funds but if it is a one time deal, it should be okay. If you are taking a loan against your 401(k) there is no penalty or tax as you will have to pay it back. You cannot just take out amounts from your 401(k). The only way you can close out 401(k) is for hardship. There is a severe penalty for that.

Answer 2

This is the type of question that requires more numbers before you can get a good answer. What is your income? How much is your contribution percentage (assuming you are still contributing to the 401 k)? How old are you? What are the types of debts, and the amounts? What is the interest on each debt? How much of a return have you been getting on your 401k investments?

If you take out $12,000 you will pay income tax on the $12,000, plus a 10% penalty ($1,200) for federal, and depending on your state, possibly a penalty for the state as well . For instance California has a 2.5% penalty..

So it isn't exactly a great idea. But if you have credit cards with a 30% interest rate then it becomes a better idea. Also your age plays a part. The closer you are to retirement, the less likely you are to benifit from the small, long-term gains of compounding your investment caoital.

Answer 3

No...if you use your 401(k) money, you will first be taxed on the money and then pay a 10% penalty, so right off the bat, figure to lose 30% of the value of your withdrawal. Then, while you are paying it back, you lose any investment earnings you might have made on that money (on top of the 30% penalty/tax). Sorry to say, but studies show that people who withdraw 401(k) almost always lose money in the long run and end up having to postpone retirement by years. You are better off working within your current budget to pay off the debt. Start by looking at your budget and determining the very maximum amount you can put towards the cards each month. Now, look at the interest on the cards - you should be paying them off from highest to lowest. Make minimum payments on all cards except the one with the highest interest - all the money left over from your card payment amount after paying the minimums goes on this card. Do this until that card is paid. The switch ALL that payment to the next highest interest card (including the minimum payment on that one of course). Continue until everything is paid off. While you are doing this, spend a month looking at your spending habits and bills. If you can, track every penny you spend for a month. Now look at the list of your spending - looking for places where you can substitute lower priced times or just plain cut something else. Big ticket items like cable can almost always be negotiated down or the bill cut (give up premium channels for a year). Check the cell phone - is your plan right for your use, do you spend on web surfing that you really don't need. Lunches while you work - do you brown bag a few times a week? If not, think about it. Have an energy audit done for your house/apartment - you can probably save 10% or more. When you find savings, keep track of how much you save and throw all that money towards the credit cards. This will pay of the cards quicker and carry over when you are debt free.

Answer 4

The conservative answer to your question is that it is probably a bad idea to take money out of your 401(k) to pay off debt. You would be better off lowering your contribution to your 401(k) and cutting back other expenses to pay off this debt.

The long answer is that there are other considerations to take into account: How old are you, and how close are you to retirement? Will you have time to pay this money back? Can you afford to lose the earnings you would have had on this 12k had you left it alone? Will the lost earnings offset the savings by paying down the debt? How much of your retirement income are you counting on your 401(k) for? Do you have other sources of retirement income?

I know this is a lot to consider, but it's a complicated issue, and there isn't any "yes" or "no" answer.

Answer 5

check into it first because allot of 401k's you can take out the money but you have to pay it back with interest. If this is the case determine whether the interest you are paying back you will lower your interest for your debt. Then decide from there. But if you do not have to pay it back with interest than I would say defiantly go for it, just as long as you don't run the debt back up. Then you will be in the same predicament then you were before just less money in the 401k.

Answer 6

Bad idea. If you are having financial problems consider contacting a financial counselor. Many work for little or no fees since they are non-profits. Put "consumer credit counseling" into Google and you'll see several options. They can help spread out your payments or reduce them or both.

401Ks should almost always be sacred. The one exception might be borrowing to buy a home - but even then that seldom turns out to be a good deal. It feels great to pay off the debt ,but don't hurt yourself in the long-term by sacraficing your retirement account- it's hard enough to save for that right now.

Answer 7

I've always been told to NEVER touch my 401k, just pretend it doesn't even exist. A lot of people I know who just got married will use their 401k to either put a down payment on a house or flat out buy a house. Bad idea.

Think of it this way, if you don't touch your 401k you can probably retire by the time you're 60 depending on what kind of money you make. If you use it then it'll set you back, couple years at least.

Answer 8

If young - horrible idea. Just creating a nice big tax liability. Debt would have to be crushingly expensive or otherwise life-ruining to do this. Cut down on current 401k inflows if must but leave what is there alone.

Answer 9

It depends. If this will totally make you debt free, it might be a good idea. If not, then you need to consider penalties and how much interest and taxes you will pay. 401K's are essentially free money and you don't want to blow any matching funds. It really depends on your plan. Talk to your plan administrator-they will assist you with specifics.

Answer 10

Don't do it. Listen to those people who said borrow against it. Check with your 401k administrator to find out it loans are permitted in your plan.

It's a slippery slope. I've known several people who took money out of their retirement plans to buy a house. They all wound up losing the house eventually, too. It seems that people who don't have the discipline to leave their retirement funds alone usually lack the discipline to save any money anywhere, or to manage their money wisely.

Don't start.