Don’t raid 401(k) to pay plastic debt
Dear Dr. Don,
We have $26,000 in credit card debt at 5.9 percent fixed. Our payments are about $400 per month. This is taking a big chunk out of our monthly budget in these tough times — not to mention the stress hanging over our heads.
Should we take a
The Bankrate feature, ”
401(k) hardship withdrawals on the rise
,” lists six IRS-approved hardships.
|6 IRS-approved hardships|
If you qualify for a hardship withdrawal under one of these six hardships, you’ll still owe income taxes and a 10 percent penalty tax. If you’re in the 25 percent marginal federal income tax bracket, that means you would need about $40,000 to pay off $26,000.
Does that still leave you with $20,000 in your
You can argue that the income tax would come due sooner or later, but paying $4,000 in a penalty tax to pay off the $26,000 debt would create more stress in my world than making a $400 credit card payment.
There are exceptions to the penalty tax for a hardship withdrawal. The exception that may fit your situation is a distribution from a qualified retirement plan (other than an IRA account) to an alternate payee under a qualified domestic relations order.
You will need professional tax and possibly legal advice to know for sure if you can pay the child support out of the
Pension and Annuity Income,” for more information.
You have your credit card debt at a very competitive interest rate. Ask yourselves if the need to free up $400 a month in the household budget is worth depleting your
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