Many people in tough economic times get pressured by collection agents to pay off their debts with their 401(k) or similar retirement vehicles.
While the funds can be used for this, should they?
Retirement of Debt or Retirement?
Why do you have a 401(k)? The simple answer is retirement. For that purpose, the government lets you take money OUT of your taxable income to save for your retirement.
The money is not taxed at the current rate, but at the rate it will be some years hence. If you break up your 401(k) today to pay existing debts, the money is taxable, and at your current rate.
Unsecured Debt
A second problem with this idea is that most debts that are being retired in this way are unsecured debts. Credit card debt is unsecured, meaning it is not secured by some asset.
Even creditors on secured debts are not able to force you to use your retirement savings to pay them. So why cash this protected asset to pay off unsecured debt?
Long-Term Thinking
What you need is long-term thinking about your future. The law protects your 401(k) from creditors. Why give it away without thinking about your long-term financial health?
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