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Hi Taylor
- I'm 24 and in a bit of a dilemma. I've got around 20,000 dollars
in my 401(k), but I also have about $16,000 in credit card debt (I
know, I know). Would it be a good idea for me to take the money out
of my 401(k) and pay down this debt? The interest is starting to pile
up and I'm worried it'll haunt me forever.
Hi Lisa - I wouldn't say it's a good idea. My gut reaction is
to yell "Nooo!" Taking the penalty on an early withdrawal is a brutal
loss of money, but I understand that there are many factors at play
and different ways to look at this situation.
A good way to think about this is to consider what's going to happen
next. By taking a massive tax penalty and losing your retirement savings,
are you going to kill off your debt, stay out of debt and immediately
start rebuilding your 401(k)? Or will this be a partial fix that doesn't
actually solve your problems and just ends up being a setback?
If your credit card debt is significant enough that you can't afford
the minimum payments and the interest just keeps piling up, you need
to do something about it. Drawing from a retirement account should
always be your last resort; if you can pay down your debt while continuing
to save, you'll eventually reach a turning point where the debt is
going down faster and your savings are working for you. Can you cut
corners elsewhere? Spend less, trade in your car for a cheaper model,
look for a second job? All of those options are preferable to spending
your savings and absorbing a 10% penalty.
More often than not, I believe there's a way to make or save that
you haven't thought of yet. You may also just feel overwhelmed by
the debt, but making timely payments and putting as much toward your
credit cards as possible will alleviate that feeling. It's easy to
look at the money in your retirement account, because it's just sitting
there, unused. But that's exactly where you want it to be.
If there's nothing else you can do and you're headed toward collection
calls and even harder times, you can think about drawing from your
401(k). Just remember, if you go this route, you have to work even
harder to save and avoid falling back into debt. Retirement is a long
ways away for you, but the earlier you start saving, the better off
you'll be. Good luck, Lisa! |
| Legal Disclaimer:
Information presented is for educational purposes only and is not
an offer or solicitation for the sale or purchase of any specific
securities, investments, or investment strategies. Investments involve
risk and, unless otherwise stated, are not guaranteed. Be sure to
first consult with a qualified financial adviser and/or tax professional
before implementing any strategy discussed herein. To submit a question
to be answered in this column, please send it via email to Question@GoFarWithKovar.com,
or via USPS to Taylor Kovar, 415 S 1st St, Suite 300, Lufkin, TX 75901.
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