Cashing out 401K to pay debt seems like a great idea till you get all the facts. There are a few, and let’s be clear about it. There are a few instances where it makes sense to do this. Your 401K is your savings for your retirement and it is best to leave that alone. There are instances where you should take it out and use it, yes, but apart from the bare emergencies such as medical or home payment related ones, you are encouraged to leave that money alone.
Cashing out 401K to pay debt
Here are a few reasons why you should not do it:
- There will not be as much money in there as you think
Every dollar you put in the 401K will be matched by your employer, but if you make frivolous withdrawals, only the money you put in will be free for you to take. That is roughly half of what you think you get. Unless, of course, your employment is terminated because of layoffs or if you quit.
- There will be taxes
There are fees for withdrawals, and as soon as you do, it comes in as taxable income. That means you are moving into a higher tax bracket. All your fees will be taken from you at once, so, end of the day, you will have to bear the brunt of a heavy tax. Withdrawing also means you need to pay 10% of the amount as a penalty right away.
- The interest rates should justify it
How expensive is the loan you are intending to pay off with your 401K? Only go for a loan like a credit card loan that is over 18% in interest. Otherwise, it is not worth it.
There are a number of other options that are still open to you. Think of consolidating your loans or moving cash between credit cards. Just negotiating with lenders often works as well. Finding debt relief the right way is simple. Always use an experienced Sacramento bankruptcy lawyer to guide you through the process. Making an educated decision about your debt is the first step to financial freedom.