Advice on paying credit card debt with a 401k - The Bills.com Blog

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Advice on paying credit card debt with a 401k

Question: I need to take care of 21,000 in credit card debt now. I am better off refinancing my two mortgages and using the equity to pay off only half my debt, or using my 401k to pay off all the debt? I have enough in my 401k, would require all of it after taxes and penalties, but could to pay off all the credit cards! Whichis better route, refinancing or 401K?

Answer: This is really a relative return question... but most likely you are best off not touching your 401k.

It sounds like you'll be better off refinancing your mortgages and getting the $10,000 to pay off half of your credit card debt. For the remainder of the credit card debt, you'll want to either set up a very strict budget to pay those down (and not add any more to them) or look at a debt settlement or other type of consolidation program (find out more on our Debt

Help page).

You really want to avoid touching your 401K balance. Although it may be harder in the short term to deal with the $10K credit card debt, you'll be in a much better position long term if you allow your 401K balance to continue to grow with all of its tax advantages. And of course, if you do liquidate the 401K, you'll be immediately liable for those taxes and other penalties, which will cost you at least $5K.

If you refi your home, you will be swapping high interest credit card debt for lower interest mortgage debt -- and

the interest is tax deductible, so the effective rate is MUCH lower.

Now, if you are under the qualifying age (not in retirement) and you liquidate your 401k -- you will have a huge penalty, and pay a large penalty in taxes... so the effective cost of that capital is really high. BUT - you could take out a loan secured by your 401k at a really low rate. That would be better than the penalty taxes of taking money from your 401k.

I hope that helps.

Best,
Bill
www.bills.com

Also, make sure to get a free financial health check-up with Bills IQ!

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Bill has answered all sorts of questions and has been able to provide those in need of financial guidance with helpful and valuable advice and information on their specific financial area of interest. If you need specific guidance on any of the above mentioned financial areas, feel free to Ask Bill your financial questions and get better informed. Also, make sure to get a free financial health check-up with Bills IQ!

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