Should I Cash in a 401K to Pay Off Credit Cards?

You will suffer in the long run by cashing out your 401K.

You Are Paying Down Debt

Cashing out a 401K seems like a reasonable option for a consumer carrying a lot of credit card debt. The interest on credit card debt can make it very difficult to pay down. The debt continues to balloon, and the consumer struggles to make minimum payments. Taking the money out of a 401K and erasing some or all of the debt would free a consumer from the day-to-day struggle to keep his bills current.

The Cost Is Steep

Cashing out a 401K has hidden consequences. You will pay a 10 percent tax penalty for early withdrawal if you are not of retirement age. This is on top of the normal income tax you will pay on the withdrawal, which varies depending on your tax bracket. Additionally, once money is taken out of your 401K, it is no longer growing because it is no longer invested and you are no longer receiving an employer matching contribution. This can cost you thousands of dollars in lost income over the long run.

Bottom Line

Cashing out a 401K is not a wise choice for paying off credit card debt. Getting rid of $20,000 in debt now could end up costing you many times that amount in the long run. You are better off leaving your 401K alone and finding alternative sources of income or looking for other expenses to cut. Use this money toward your credit card bills and let your retirement savings continue to grow.