Should I Cash Out My 401(k) To Pay Off Debt?

Under most circumstances, if you cash out your 401(k), you will have to pay federal, state, and local income tax.

You will also owe an early withdrawal penalty - 10% - if you are under the age of 59 1/2.

In almost every case, for every $100 dollars you withdraw, you will pay between $25 and $50 dollars in taxes and penalties.

In other words, unless you are doing so to avoid bankruptcy, it’s a bad idea to cash out your 401(k) and pay off debt.

Instead, live on a budget, reduce spending, and create a debt snowball.  Stop looking for ‘quick fixes’ and learn to ‘do the work’.

Finally, if you cash out your 401(k), you lose years of ‘compounding power’.  To see how important ‘compounding’ is, check out this chart.

Over the next few weeks, I’ll post more ‘Questions And Answers About Debt Reduction’.

If you have not done so, consider subscribing to the No Credit Needed RSS Feed.

For in depth information about this topic (and similar questions), check out these articles from my fellow members of the Money Blog Network -

Can you cash out Roth IRA to pay off house? (Five Cent Nickel)

Should you borrow money from your 401(k)?  (Consumerism Commentary)

How much will a 401(k) loan cost you?  (All Financial Matters)

Your 401(k) is not an ‘investment’  (Wise Bread)

Don’t Kill Your Retirement Fund When You Change Jobs (Free Money Finance)

How Strong Is Your Piggy Bank? (Mighty Bargain Hunter)

Three Popular (But Dumb) Money Moves (Get Rich Slowly)