The Help Desk

Your tough questions. MONEY's smart answers.
Presented by

Should I cash out my 401(k) to pay off debt?

June 29, 2011: 5:05 AM ET

I'm 28 and have about $4,000 in debt on different credit cards, all with rates in the upper teens. I'm not charging more—the debt was due to a one-time event—and I'm changing jobs soon. Does it make sense to cash out my 401(k) (which holds about $5,800) to pay off the cards? —Name withheld upon request

Taking money out of a retirement account early is almost never a good idea, says Ann Garcia, a financial planner with Maas Capital Advisors in Portland, Ore. In your case, it doesn't make sense for several reasons. First of all, after paying taxes and penalties, you probably wouldn't wind up with enough money to fully pay the debt. And you'd lose your nice start on a retirement nest egg. Though $5,800 may not seem like a huge amount, left untouched it will be worth as much as $85,000 in retirement, calculates Garcia.

A better strategy: Do your best to increase payments on your credit cards. You're already on track because you aren't piling on more charges. Say you're paying $125 a month now on your cards. If you increased that to $225, you'd retire your debt in two years instead of four and save about $800 in interest payments. Each time you get a pay increase—such as when you start your new job—put the extra amount into paying off your cards faster. (You may have a waiting period in your new job before you are allowed to start contributing to a 401(k) or other employer-sponsored retirement account. During those months, put the money you would be contributing to your 401(k) toward your debt.)

Finally, call your credit-card issuers and ask them to lower your rate. One of them may be willing to do so if you consolidate all your balances on that card. A caveat: Be careful of teaser rates if you go this route. Your card company may guarantee a lower rate for a limited period of time, then raise the rate afterwards. Be sure you can pay off the debt during the low-rate period before consolidating.

-- Walecia Konrad

Got a question for the help desk? Send it to helpdesk@cnnmoney.com.

Posted in: Credit, Family Money
Join the Conversation
Help Desk

Got a question about your money? We want to hear it! Each week we're answering your questions on CNN, Headline News and CNNMoney.com.

Your email or phone number won't be published; we'll use it to get in touch if we need more information about your question.
Help Desk Video
  • NEXT
    Not enough money in America's 401(k)s
    Despite the surging stock market bringing balances to record highs, the average Fidelity 401(k) account has less than $100,000 in it. That's just not enough. Play
  • NEXT
    BACK
    Explaining Obama's myRA
    President Obama unveiled a new savings plan for retirement accounts, aimed at encouraging people to start building their nest egg. But how exactly does it work? Play
  • NEXT
    BACK
    Tricks on how to save in your 20s
    Saving for your retirement in your 20s doesn't have to be a financial burden. Prioritizing your expenses is usually the first step in building a nest egg. Play
  • BACK
    Don't get fooled by Black Friday sales
    Here are some of the tricks that retailers use to make you think you're getting a deal. Keep an eye out for them while shopping this Black Friday. Play
Best Tips
Some of the nation's leading business owners, investors, and thinkers share their thoughts on rebuilding your wealth. More
These strategies can help you manage the challenges -- both emotional and financial -- of helping an aging parent from afar. More
You don't need to be fanatical to get to 780. Those in the know say these moves matter most. More
Featured Newsletters

Tips for saving and spending smarter.

Search This Column
View all entries from this: Week, Month
Help Desk
More help for your career, your investments and your budget.
Powered by WordPress.com VIP.