I have credit card debt of $25,000. Currently, my interest rate is 13 percent. Is it a good idea to take money from my 401(k)
and pay the credit card off if I plan on retiring in two years? Or should I leave the money there and pay more each month on
the bill and still owe on it when I retire?
-- Christine Cash-Out
The typical 401(k) plan doesn't let
you withdraw money from the plan while you're
still working, except for specific hardship withdrawals.
It's rare, but some plans do offer nonhardship
withdrawals -- check with your plan sponsor. The
IRS publication "Retirement
Plans FAQs Regarding Hardship Distributions"
has more information.
If your plan allows it, you can borrow from your 401(k) and the loan becomes due and payable when you leave the
company. That could get you a lower rate on the loan than the 13 percent you're paying on the credit card.
You'd also establish a repayment schedule for the 401(k) loan so you'd have at least some of it paid off by the
time you retire.
However, borrowing from the plan doesn't make sense if it prevents you from contributing to your account while
receiving a company matching contribution. You may be paying 13 percent on your credit card, but you're earning
50 percent on the typical company match.
I'd much rather see you plug away at paying down the debt out of current income and leave your 401(k) alone.
Racking up this level of debt means you weren't able to live within your means when you were working. It's not
going to get any easier in retirement -- especially when you raid your retirement portfolio for $25,000.