Should I use my 401k to pay off debt

A certified financial planner helps to weigh in no the age old question: Should I use my 401k to pay off debt?

When you see money in your 401k, there is temptation to make that credit card debt disappear. We all know it takes more years than you wish to admit in order to make progress on your credit cards, especially if you are only paying the minimum payment.  But using your 401k money to pay off credit card debt is not a good option for several reasons.  Here are three:

1. Taxes and penalties.

If you aren’t at retirement age and take the money out early, you will have to pay the IRS 10% and then you have to pay income taxes. As an example, if you take out 30k, it would be a penalty of $3,000 and then at a 20% tax bracket that’s another $6,000 with a total of $39,000. That’s like taking out a high interest loan.

2. Money Stops Working For You

Its actually worse than the $39,000 above, because now the money is not be working for you.  That $39,000 used to pay off $30,000 in debt could potentially be worth a million dollars in 30 years.  Don’t compromise your retirement over an unsecured credit card debt.

3. You need to attack the credit card debt, not the 401k.

This isn’t an overnight solution, but once you develop a plan, you will be surprised at how much progress you can make.   These tips will help:

  1. Budget. Create a budget so you can understand your income and expenses and find ways to make extra payments on your credit card debt.
  2. Stop Contributing. Until you are out of debt, you should temporarily stop contributing to your 401k or at least cut back to the minimum amount in order to get your  company match.  Think about this:  keeping debt while you are investing is the same as borrowing money to invest with.  Once your debt is gone you will have more money to invest.
  3. Get a second job. Not for the rest of your life, just long enough to pay off your  debt.  Extra payments to your credit cards will be applied toward the principle and will drastically reduce the time it will take to get it paid off.

The most important thing you can do is to change the habits which created the credit card debt.  Don’t sacrifice your future for a quick fix.

Having high debt lowers your credit and makes you high right. Ask yourself, what good was credit if it just landed me in debt?

If you are struggling to make your minimum payments or you are behind on credit cards, a debt relief program may be the best debt solution. Call Debt Settlement Group today for a free evaluation at 1-888-933-2879.

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