Try to avoid cashing in your 401K to pay bills
Cashing in a 401K savings plan to pay credit card or other bills is frequently considered by individuals. In most situations, it is not a good idea.
You cannot solve a problem by wiping out your retirement funds to deal with the debt. Don’t do it.
An individual poses the question, “I have a credit card bill at 12.9% and am not earning close to that with my 401K. Why not cash in my 401K balance to pay my debt?“
Well, the answer is simple. You will have to pay income tax income tax on your 401K balance in most instances, plus a 10% penalty for early withdrawal if under 59 years old.
So let’s say you wanted to withdraw $5,000 from your 401K, the 10% penalty reduces that to $4,500. Let’s assume your tax bracket is 28% based on your income. That leaves $4,500-$1,400 or $3,100 from the original $5000, losing you 38% of the original amount.
No, a better option would be to try to pay off your credit card bills over time in a disciplined way and leave your 401K to grow and compound over time.
If things are really tough, one option may be to borrow from your 401K and then pay yourself back over time. This way, you will not be subject to tax or early withdrawal penalties – you will have have to pay interest though.
If you need help negotiating your debts with credit card companies and working out a repayment plan, go to your nfcc.org, the National Foundation for Credit Counseling.
