I went through a bad time and accumulated $31,000 in credit card debt. I also have $23,000 in Student Loans.
I managed to finally cut myself off for some time now but I am seeing those credit card interest charges building up while I’m paying things off and I unfortunately have higher expenses due to my job being in a major CA city so I can’t increase my monthly payments.
On the side, I have a 401K with $67,000. I only make around $110,000 per year.
I understand if I withdraw from my 401K, I would have to pay 10% penalty fee, up to 24% federal taxes, and 9.3% CA state Tax, and 2.5% CA early withdrawal penalty.
1) Am I missing any other immediate fee/penalty if I withdraw?
2) If you properly do the math is the decision to withdraw from my 401K to pay off all debt and loans in one go – a bad decision?
Paying Off Student Loan and Credit Card Debt with 401K
byu/Neptune-Cicero10 inpersonalfinance
Posted by Neptune-Cicero10
8 Comments
Bad idea.
You’d net around 40k. But you just screwed your future self. That $67k could double in 7-8 years. If you take it out now, how long would it take you to save another $67,000? A long damn time. Never a good idea to borrow from your future
>**2) If you properly do the math is the decision to withdraw from my 401K to pay off all debt and loans in one go – a bad decision?**
Yes
I would look into debt consolidation or continually transferring to 0% introductory rate cards long before touching 401k.
You can probably get a 9-10% consolidation loan, depending on your credit.
This is assuming you have stopped accumulating credit card debt. If not then you have to address that first.
Terrible idea. Find a better solution.
>If you properly do the math is the decision to withdraw from my 401K to pay off all debt and loans in one go – a bad decision?
Do you think you’re missing something in the math? 45.8% is almost certainly higher than the interest rates on your debt. And 45.8% of $67k leaves you with $36k…which is not enough to pay off everything in one go.
>I unfortunately have higher expenses due to my job being in a major CA city so I can’t increase my monthly payments.
It might not be *comfortable* but there is likely more you can cut in your budget. It’s a near certainty with posts like this.
1. No
2. You didn’t give interest rates, so we can’t actually do the math. That being said, yes, it’s a terrible idea.
Whether or not it’s a bad idea, hopefully there are better options.
401k loan (although not without risk) is probably much better. There may be limits (50 percent of your 401k or less, at most), so probably can’t clear the debt completely. But it’s an option to refinance at least some of it at a lower rate.
0 percent balance transfer offers if you qualify for that, which can pause the interest for 1 or 2 years.
A personal loan at maybe 8 percent or so.
I’d be exploring any of these options first. Prioritizing the high interest credit card debt.
Pretend the 401k doesn’t exist. You need to find other solutions, they’re out there.
– stop contributing and put that towards debt
– lower your expenses by getting a roommate or moving in with someone
– get a second job delivering pizzas on the weekends
– find a higher paying job
It’s out there, you just need to think harder.