Should I pull/borrow from 401K to pay off CC Debt? ?

Hello - I'm 27 and Married (my husband is 34). We own a home which currently has no equity. We have $52K in CC debt. I know exactly how we got there and we haven't use CC in years (our CC debt started at $85 two years ago). We've been doing a relatively decent job of paying them off but with the recent market crash many of our CC companies have decided to hike up our APRs to 18%+ (all were below 8%). It has make it nearly impossible to pay off any principle balance lately.

Our question is, my husband has $60k+ in his 401K from a previous job (he's now self employeed). Should we or can we pull or borrow from this to pay off our CC debt?


We have/ I have contacted all of our CC companies and received the lowest rate possible and consolidated where I could at a lower interest rate where possible. We do not want to purposely default in order to get debt consolidation. Bankruptsy is not an option.

3 Answers

  • 1 decade ago
    Favorite Answer

    I feel your pain - essentially, you need to decide a few things here:

    - If you want to default, since the debt is substantial, obviously don't touch the 401K (this is a last-resort option, but I want to mention it up front).

    - If you want to reorganize, do *not* use a debt consolidation service. Call each card company and renegotiate the rate. They're all concerned that people will take option (a) above, so you have some bargaining power, especially if you've been paying off the cards reliably for a couple of years.

    - If you haven't look at cheap balance transfers, now is the time to do so. Discover and Mastercard have a few I've seen - you may well be declined, but it's worth an online application.

    Ok, so now onto your 401K:

    - Any money you remove obviously gets the 10% penalty + taxes, which will amount to around 35%. That leaves you with $39k (roughly), which doesn't pay off the cards.

    - If it's still worth $60k after all the recent problems, I would suggest not using this money, since it will likely recover in the next 2-3 years (if it's equity based).

    - If your APR gets increased further, or your income situation changes, then you should reassess what I've just said.

    As an aside, I have a suspicion that the tax rules may get changed in January to accommodate emergency 401k withdrawals (ie. removing the penalty) due to the economy. So if you can hold off until then, I would recommend doing so.

    I hope this helps!

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  • Kay
    Lv 6
    1 decade ago

    Since your husband is younger than 59-1/2 years old, he will have to pay early withdrawal penalty of 10%.

    Obama was proposing when campaigning to waive the 10% penalty and allowing people to withdraw up to 15% of the total value of the 401k. If you could wait until he takes the office of presidency to begin making economic stimulus plans of his own.

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  • what?
    Lv 6
    1 decade ago

    well, if you withdraw the money in your 401k, you could end up owing as much as 45% of what you withdraw in taxes and penalties. if you really hate credit card debt that much, that's your choice, but i would say that it's a pretty dumb move.

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