Should You Raid Your 401(k) To Pay Off Credit Card Debt?

No Brainer Day-7I recently saw this as a question and answer article online. I get this question in my practice quite frequently. Sometimes the client is asking if it makes sense to pay off credit cards, other times cars, sometimes even their children’s school loans.

My opinion on this is pretty straightforward. Your 401(k) isn’t that little pink piggy bank in your closet in your room. It shouldn’t be used for whatever you want. 

Most plans don’t offer a way to access the 401(k) account while you are still working. On the other hand if your plan has loan provisions you could use that. However, if you can’t pay it off with extended terms, what makes you think you’ll pay it back in the required 5 years in the 401(k)?

Some plans offer hardship withdrawals. If your plan offers a hardship withdrawal, credit card debt, car loans, ect. do not constitute hardships. Hardships are typically things like the death of an income producing spouse. Keep in mind this is a taxable distribution and incurs the 10% early distribution penalty. In addition, you may not be permitted to contribute to the plan for another six months after the withdrawal.

So with all these limited options, it may be a situation where you just need to learn to live within your means. The fact that this is one of your only solutions typically tells me that you have a spending problem. Cut the cards up, switch to cash, and work out a repayment plan with the card companies that you can live with. 

Cashing out your 401(k) to pay for past spending sprees, giving you a big tax bill, and short on retirement savings seems pretty dumb when you think about it.

Don’t do it.