401(k) Borrow or Cash out?

Question

I have three seperate 401(k) plans from three seperate employers. I never combined them. One of them is only about $7,000. I have $5,000 in credit card debt that I want to pay off to save on interest. Would it be better to borrow against my current 401(k) or to cash out the smaller one and just pay off the credit card debt? I am not worried about the 10% penalty as I will save more than that in interest this year alone.

Answer 1

Don't cash it out! It will end up costing you much more than the 10% penalty in the long run. Once you take the money out, you will miss out on all the tax-free growth from now until retirement. Depending how long that is, your money can easily double, triple or more in that time--but only if you leave it in there.

Borrow the money from your 401k if you have to, but even that should be a last resort, since you still miss out on the tax-free growth until you pay the money back into the 401K.

A better option is to transfer your balance to a card with a 0% promotional rate, then save money from your paycheck to pay it all off before the interest rate goes back up. That way you don't touch your retirement money.

By the way, if any of your 401k plans are from ex-employers, you can roll them over into a regular IRA. You get more investment choices that way.

Answer 2

The penalty is worse than that, from the $5,000 you will only see maybe $3,000 if you are lucky. Better to borrow the money and "Pay yourself back" for it.

Roll them all into an IRA, Fidelity does this for free. You can even add to the account and save up for retirement.

Answer 3

dont forget that on top of the 10% penalty, you also have to pay regular income tax! That could add up to another 15-30% depending on your bracket. that of course assumes that you are not pushed into the next bracket because of the withdrawal

Answer 4

I would borrow.