I dislike the idea of using your 401(k) funds to pay-off your credit card debt, especially if you have options.
First let us look at the cost of taking a distribution from your 401(k). If you are less than age 59½ of age, you will pay a 10% penalty tax. In this case, that is an immediate cost of $20,000. Then you will need to pay income taxes on the $200,000 distribution. Although I do not know your tax rate, we can estimate for the sake of argument that you would pay 30% in income taxes (no doubt my guess is incorrect on the low side). That is another $60,000. Therefore, taking a $200,000 distribution will cost $80,000 in taxes.
One alternative is instead of a distribution, you can get a loan on your 401(k). This will have the advantage of not costing you anything in taxes. Also, when you repay the loan, you are actually repaying yourself.
Other alternatives are debt settlement, credit card counseling, or a home equity loan. See the Bills.com white paper Debt Relief Options: Which is Right for You? to learn more about your choices.
I hope this information helps you Find, Save, and Learn.
Best,
Bill
www.bills.com/blog
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