# Lifestyles & Discussion > Personal Prosperity >  Should I cash out my 401k to pay off debt?

## ToxicFrog

After mortgage and monthly bills, I am spending the majority of my paychecks paying down credit card debt (totalling about $19K).

I have about 22,000 in a 401k.  Because I have almost no faith in the stock market for the forseeable future, I am considering cashing out my 401k to pay off my debts.  If I do so, I will be able to put about $1000 into saving and/or other investments each month.  

I understand that I'll pay a big penalty on cashing out, meaning I'll actually get a little more than half of that $22,000.  But, it will nearly end all my debts (other than mortgage).

Most sites I've looked at strongly recommend against doing this, but I'd like to hear from folks here that are outside the standard government/keynesian mode of thought.

I appreciate any input.  Thanks!

----------


## LibertyEagle

I wouldn't.  The gummit is talking about bailing out credit card holders.  Or at least that is my understanding.

Plus, can you even cash out your 401K?

----------


## yokna7

get some gold.

----------


## ToxicFrog

I would assume the govt would not bail out this credit card holder.  The fact is, I have excellent credit and have a job that pays me a decent amount.  So I assume that I'm not enough of a deadbeat to get any govt assistance.

I am capable of making ends meet, but I am sick as hell of being in debt.  I was going to be debt-free (other than mortgage) about 6 months ago until my ex-wife left me and got greedy during our divorce (against her original promises, I might add).  So my debt went up to uncomfortable levels.

I want to be able to use my money for savings and buying things rather than paying down debt, which is why I'm considering this.

----------


## Johnnybags

Wait for the Obama Amnesty plan within 2 years. If the debts are strangling you now, simply call em up and tell em to lower the minimums and the rates or you might not pay at all.

----------


## madengr

> I have about 22,000 in a 401k. Because I have almost no faith in the stock market for the foreseeable future


I would not touch it.  I don't know your age, but I'll guess you have 30-40 years before retirement.  We will probably have more bubbles and recessions during that time frame.  Can you put it into an international stock fund?  If we do have inflation then your debt will be reduced and at worst your stocks will grow due to inflation.  You can always use it for an emergency, but I would not pay off debt with it.

I have seen allot of threads on here about people wanting to pay off debt.  Hell, with all the bailouts and $ uncertainty, now is the least time you would want to pay off debt.

----------


## clb09

What is the average annual percentage rate on your credit card debt?

Do you think you could match or beat that percentage with GAINS in your 401k over time?

If not, then cash out your 401k. 

When you pay your credit card debt it is the same as a guaranteed return on your money at the credit card APR. 

If your paying 14% on your credit cards, for example, and you don't think you could earn 14%  per year guaranteed with your 401k investments then you would make (or protect) more money by cashing out and using the proceeds to pay down the high interest rate debt. 

Don't depend on the government to "bail" you out or provide "assistance" or "relief"!

The idea is to be self-sufficient.

Hope this helps.

----------


## Firegirl

I think it would depend on the interest rate on the credit cards, etc.  

When I first went to a financial advisor, he made me realize I was being a dumbass about my debt.  I was garnering about $50-$100 in interest a month on my debt and only paying the minimum amount.  Basically I was running in circles and it was going to cost me about $10,000 to pay off $6000 in debt with all the interest I was paying.  And the whole time I had enough money to completely pay off the debt and have some emergency savings left over.  If you can take a BIG chunk out of your debt AND leave yourself with some emergency savings money, I say do it.  I've been able to save so much money into my retirement and savings since I did.

Totally debt free (except the mortgage) and I'm NEVER going back....

----------


## bobbyw24

Transfer your 401(k) assets into an IRA that can hold GOLD bullion:

http://www.GloomDoom.com

----------


## ladyjade3

Not that I'm recommending either way, but my husband did that with his 401k.  I did not.  Thus we have sort of hedged our bets on that issue.

----------


## Danke

See if you can borrow money from the fund.  I have done that.  You have to repaid it, but all the money and interest goes back into your fund.

----------


## Zippyjuan

Cashing out will cost you an awful lot. First you face a ten percent penalty. If you have $22,000 that means that you lose $2,200 off the top.  Then you have to pay income taxes on it too.  In a 25% tax bracket you are down to $14,850. You are giving away over $7,000 and would still not eleminate all of your debt while draining your savings.  You are also giving up any future returns on that money were you to leave it in the 401k.  

Would you have any money to live off of in case of an emergency?  You should have at least enough money to be able to pay your bills for about six months in case you found your self unable to work- maybe longer in this economy.  If this 401k is your only fund, that is another reason not to cash it in.  I could see suspending contributions to the 401k and putting that money towards getting rid of the debt but would not liquidate the 401k.

----------


## RCA

I say get rid of the debt. There is a stress factor involved that can't be put on paper. Never count on any bailout. Then start buying silver and gold coins with your extra cash.

----------


## Met Income

> I say get rid of the debt. There is a stress factor involved that can't be put on paper. Never count on any bailout. Then start buying silver and gold coins with your extra cash.


Don't pay 10% + income taxes

----------


## Godisnowhere

I would buy Silver. It is priced better than Gold now and is actually becoming more rare since it is being consumed by industry unlike Gold. Open a Goldstar Trust or Sterling Trust Precious Metals IRA, put your money into the account, then buy Silver from Apmex, Colorado Gold, Monex, NW Territorior, GoldSilver, or one of the other brokers who has best prices for what kind of silver you choose.  Keep your mortgage it is a good tax break.

----------


## Josh_LA

Normally it's a no brainer, yes to paying down debt no matter what.

But maybe you should cash out half and pay off half.

Credit card debt is not something that'll appreciate and profit for you later, is it? If not, get rid of it.

----------


## Josh_LA

> I say get rid of the debt. There is a stress factor involved that can't be put on paper. Never count on any bailout. Then start buying silver and gold coins with your extra cash.


I agree, unless of course you have no sense of responsibility, then you'd have no shame, no stress, and no troubles.

----------


## Josh_LA

> Cashing out will cost you an awful lot. First you face a ten percent penalty. If you have $22,000 that means that you lose $2,200 off the top.  Then you have to pay income taxes on it too.  In a 25% tax bracket you are down to $14,850. You are giving away over $7,000 and would still not eleminate all of your debt while draining your savings.  You are also giving up any future returns on that money were you to leave it in the 401k.  
> 
> Would you have any money to live off of in case of an emergency?  You should have at least enough money to be able to pay your bills for about six months in case you found your self unable to work- maybe longer in this economy.  If this 401k is your only fund, that is another reason not to cash it in.  I could see suspending contributions to the 401k and putting that money towards getting rid of the debt but would not liquidate the 401k.


Then how about cash out half of it.

You'll take out $11k
Lose 1.1K to taxes
I don't think you're in a 25% bracket if you need $20K right now.

But let's say you ARE
You'll have $7.5K which will cut your debt down to $11K

I don't think somebody who's worrying about paying debt can/should think about emergency money.

----------


## EddieG

It's a tough call.  First off, you are going to have to pay taxes when you cash out, so you don't "lose" anything with taxes. 10% is about 2K in penalties with what you have-- not all that much. Plus, if you have as lousy of choices as most 401Ks do- large cap US stocks, bonds, and money markets-- you will probably lose more than 2K even in nominal dollars. 

To me, the big question w/retirement plans comes back to the usual culprit- government.  Will they confiscate them (i.e. nationalize them in a social security like acct and spend the proceeds)? I fear they will.

If I had significant credit card debt and it was variable rate, I'd be inclined to pay off that debt. I'd leave fixed debt alone; massive inflation will take care of that for you.

----------


## brandon

What interest rate are you paying on your credit card debt, and how much money are you able to spend paying down the debt each month?? It should be easy to calculate which plan of action would be the least expensive.

----------


## Brian4Liberty

> See if you can borrow money from the fund.  I have done that.  You have to repaid it, but all the money and interest goes back into your fund.


Now that's a great idea! 

If that doesn't work, can you consolidate into a cheaper loan? Most credit card rates are ridiculous.

In general, I wouldn't recommend paying off a low-interest loan right now...

----------


## Josh_LA

> Now that's a great idea! 
> 
> If that doesn't work, can you consolidate into a cheaper loan? Most credit card rates are ridiculous.
> 
> In general, I wouldn't recommend paying off a low-interest loan right now...


credit cards are not low interest, or that wouldn't be a question.

i don't know enough about IRAs and 401k, but I WOULD NOT borrow money from it, why? Because why pay interest on it when you at worst pay a 10% penalty?

----------


## Josh_LA

> If I had significant credit card debt and it was variable rate, I'd be inclined to pay off that debt. I'd leave fixed debt alone; massive inflation will take care of that for you.


let's see massive inflation take care of you when you don't have a job.

----------


## EddieG

That debt will be the least of his concerns.  Food prices will be a bigger problem.

----------


## Brian4Liberty

> don't know enough about IRAs and 401k, but I WOULD NOT borrow money from it, why? Because why pay interest on it when you at worst pay a 10% penalty?


You are paying the interest to yourself when you borrow from a 401(k). It's like your 401(k) has an investment option of "loan money to myself at x%". Your 401(k) makes money from the deal.

No penalties. No loss of funds in your 401(k).

----------


## Josh_LA

> You are paying the interest to yourself when you borrow from a 401(k). It's like your 401(k) has an investment option of "loan money to myself at x%". Your 401(k) makes money from the deal.
> 
> No penalties. No loss of funds in your 401(k).


what if your 401k remainder  depreciates? you'll be paying interest on yourself for something that's shown to lose value?

----------


## Brian4Liberty

> what if your 401k remainder  depreciates? you'll be paying interest on yourself for something that's shown to lose value?


By 401k "remainder", do you mean the excess money in your 401(k) that you don't loan to yourself? You can usually invest that in anything, but it depends on your 401(k). If you're lucky you have the option of investing in GDX...

401(k)s are great in that they sometimes having employer matching, and you don't have to worry about IRS bs for all your transactions. No difference between a short and long term capital gain, no end of year tax paperwork. Buy and sell all you want. Big caveat is the options your 401(k) plan gives you for investing. Many have all the options of a standard broker, but some may be limited. You may have idiots at your company choosing/running the 401(k), so always make sure you have unlimited investment options.

----------


## satchelmcqueen

i say cash it out. i never got into the thing myself. always feared a crash in the economy, plus the fees that rob you blind if you ever do take it out. JMO

----------


## Josh_LA

> By 401k "remainder", do you mean the excess money in your 401(k) that you don't loan to yourself? You can usually invest that in anything, but it depends on your 401(k). If you're lucky you have the option of investing in GDX...
> 
> 401(k)s are great in that they sometimes having employer matching, and you don't have to worry about IRS bs for all your transactions. No difference between a short and long term capital gain, no end of year tax paperwork. Buy and sell all you want. Big caveat is the options your 401(k) plan gives you for investing. Many have all the options of a standard broker, but some may be limited. You may have idiots at your company choosing/running the 401(k), so always make sure you have unlimited investment options.


ok, let's play some numbers.

Let's say I have $22K in my 401k today

I borrow out $10K of it, leaving $12K in it.

If I were to pay it back 5 years later, I'd owe 5 years worth of interest (5% or more I assume)

But what if my 401k depreciated? (is that a possible scenario?)
Now my originally $12K+ portfolio is worth only $9K
If that were the case, wouldn't I have been better off taking a one time penalty of 10%? 

Why would I want to pay back + interest into this losing portfolio?

----------


## Brian4Liberty

> ok, let's play some numbers.
> 
> Let's say I have $22K in my 401k today
> 
> I borrow out $10K of it, leaving $12K in it.
> 
> If I were to pay it back 5 years later, I'd owe 5 years worth of interest (5% or more I assume)
> 
> But what if my 401k depreciated? (is that a possible scenario?)
> ...


I believe you pay back your 401(k) loan on a schedule (like a mortgage or credit card).

Assuming that you have a good 401(k) with broker-style options, you can invest in any portfolio you invest in outside a 401(k). It's up to you to invest so you don't lose too much money. You can play it super-safe (money market or some bank-style money fund), or you can take some risk. There's risk in or out of the 401(k). Your $12k portfolio could grow to $50k in 5 years. I invest in GDX, USAGX, CEF, GLD, SLV, SLW, etc.  I expect that to go up...

----------


## Danke

> I believe you pay back your 401(k) loan on a schedule (like a mortgage or credit card).


Yes.

----------


## RonPaulCentral

> After mortgage and monthly bills, I am spending the majority of my paychecks paying down credit card debt (totalling about $19K).
> 
> I have about 22,000 in a 401k.  Because I have almost no faith in the stock market for the forseeable future, I am considering cashing out my 401k to pay off my debts.  If I do so, I will be able to put about $1000 into saving and/or other investments each month.  
> 
> I understand that I'll pay a big penalty on cashing out, meaning I'll actually get a little more than half of that $22,000.  But, it will nearly end all my debts (other than mortgage).
> 
> Most sites I've looked at strongly recommend against doing this, but I'd like to hear from folks here that are outside the standard government/keynesian mode of thought.
> 
> I appreciate any input.  Thanks!


1) Take a loan against the 401K 
2) Pay the credit cards
3) Pay back the 401K loan

Most 401K programs will allow you to borrow against the funds, many times at no interest.  Many time there is interest charged BUT it is completely credited back to you (the interest) upon full repayment of the 401K loan.

Taking the 50% loss is crazy to just "give away" up front.  Your holdings in the 401K would have to collapse 50% to equal what you are just willing to give away.

By doing what I am talking about you will be eliminating all the interest on the credit card debt while still being able to maintain the 401K and not take a huge up front loss.

Good luck.

----------


## Zippyjuan

A little info on borrowing from your 401k
http://www.smartmoney.com/personal-f...-or-403b-9657/



> Should You Borrow From Your 401(k) or 403(b)?
> ·Click here to see the worksheet below
> THESE DAYS, more than 85% of workers with 401(k)s can borrow from their plans. And a growing portion of 403(b) plan participants can too. If you've been diligently socking away a portion of your salary over the past few years (and you've had a match to boot), chances are that puts a lot of cash at your fingertips. It certainly doesn't make sense to use this money for luxuries like a backyard swimming pool or a new car. But does it make sense to tap your 401(k) or 403(b) to pay off a loan?
> 
> *Typical plans allow you to borrow up to half your vested balance, but not more than $50,000. (Some plans might restrict borrowing to specific reasons, like a home purchase, education or medical expenses.) You usually must pay the money back, with interest, over five years. But, because you are paying the interest to yourself, it isn't an additional cost. Just think of it as forced savings. If you don't repay the loan, you will owe income tax and a 10% early withdrawal penalty.*
> Sounds like a pretty good deal, right? Well, there are a couple of big drawbacks. First, you are giving up the tax-free compounding of the money you withdraw. That could lead to a signficantly smaller nest egg come retirement. Also, if you leave your current employer for any reason, you will probably have to pay the loan back immediately or face taxes plus a penalty.


So in your case, it seems that you could borrow up to $11,000 and have to repay that back to the account within five years (unless you change employers in that time in which case you have to pay it all back or face the penalties as if you had withdrawn it).

----------


## clowns789

> 1) Take a loan against the 401K 
> 2) Pay the credit cards
> 3) Pay back the 401K loan


Bingo!

----------


## Zippyjuan

Of course this all assumes you do not use the credit card for anything anymore.  If you borrow from your 401k but continue to charge you are only digging in deeper while wiping out your savings for an emergency.

----------


## Josh_LA

> I believe you pay back your 401(k) loan on a schedule (like a mortgage or credit card).
> 
> Assuming that you have a good 401(k) with broker-style options, you can invest in any portfolio you invest in outside a 401(k). It's up to you to invest so you don't lose too much money. You can play it super-safe (money market or some bank-style money fund), or you can take some risk. There's risk in or out of the 401(k). Your $12k portfolio could grow to $50k in 5 years. I invest in GDX, USAGX, CEF, GLD, SLV, SLW, etc.  I expect that to go up...


how safe is safe?

is it as guaranteed as CD?

If not, haven't most people already lost some of their money as a result?

----------


## Josh_LA

> Of course this all assumes you do not use the credit card for anything anymore.  If you borrow from your 401k but continue to charge you are only digging in deeper while wiping out your savings for an emergency.


more importantly, this assumes you borrow at a lower interest than your credit card, and your 401k is worth paying back (not cashing out).

----------


## Brian4Liberty

> how safe is safe?
> 
> is it as guaranteed as CD?
> 
> If not, haven't most people already lost some of their money as a result?


Yep, you can be a safe as a CD. Many even have the option of CDs. The "safe" options are either insured by FDIC or SIPC.

Most people in 401(k)s had their money in stock mutual funds. Mostly big cap, DOW, S&P 500, 1000, Wilshire indexes. Also financial, tech, emerging markets and real estate related mutual funds. That's why they all took a hit. And they don't pay attention at all to the investments. They invest and forget. Not a good strategy for them. But it was good for Wall St. to have all this dumb money thrown at them for years.

Then again, mining stocks in 401(k)s took a hit too. But they have come back some, and promise to come back more. Bullion funds like CEF didn't do too bad, as they came right back.

A 1 year comparison chart of metals (CEF, GLD, SLV), mining (GDX), and S&P, DOW:

Chart here

Note how much worse S&P and DOW have done...if you played GDX right, you would be really happy.

Of course a cash option over that period would be almost a flat line, with a little interest gain.

----------


## Carole

> After mortgage and monthly bills, I am spending the majority of my paychecks paying down credit card debt (totalling about $19K).
> 
> I have about 22,000 in a 401k.  Because I have almost no faith in the stock market for the forseeable future, I am considering cashing out my 401k to pay off my debts.  If I do so, I will be able to put about $1000 into saving and/or other investments each month.  
> 
> I understand that I'll pay a big penalty on cashing out, meaning I'll actually get a little more than half of that $22,000.  But, it will nearly end all my debts (other than mortgage).
> 
> Most sites I've looked at strongly recommend against doing this, but I'd like to hear from folks here that are outside the standard government/keynesian mode of thought.
> 
> I appreciate any input.  Thanks!


Watch carefully to see if Congress takes up a bill to take over (nationalize) the 401K's, This is being bandied about by a few in Congress.

For sure, if that happens, take out your money immediately.

----------

