Dear Liz: I had to retire because of illness at 44. I have $30,000 in credit card debt. Should I use the $24,000 in my 401(k) to pay off the majority of that debt? The payments are $1,000 a month. My wife and I can afford the payments, as we have a combined gross income of $120,000. But we hate to think we’ll be paying forever and, worse yet, what we’ll pay in interest over time. A home equity loan is out of the question since we only have about $50,000. What should we do?
Answer: Don’t use retirement funds to pay off credit cards. Period.
If it pains you to think about the interest you’re paying, good. That may keep you from running up more debt.
But you’ll pay a lot more in the long run by raiding your retirement fund. First, you’ll lose one-third or more of your savings ($8,000 or more) to taxes and penalties. Then you’ll lose all the future, tax-deferred returns your 401(k) could have earned. You can figure that the $24,000 will easily cost you more than $100,000 in lost future retirement income.
A better approach is to cut your expenses so you can put more money toward paying off your debt. An extra $500 a month could shave a year or more off the time you’re in debt and save you a considerable amount in interest.