Can I withdraw funds from my 401k to payoff debts without penalty?
I'm a 52 year old with $40K in credit card debt. I would like to withdraw from my account without the 10% penalty. My 401k amount is only 2 times my debt. Is this possible or a wise decision? My credit card interest is 15% and my 401k earnings are around 8-10%.
The credit card debt is a killer. Mathematically, it may make sense to borrow (not withdraw) from your 401k to pay off your credit card debt. Since you can borrow the lesser of the $50k or 50% of your account balance, the most you can borrow may be $40k.
Here are other considerations: 1) Layoff. When you are laid off, the 401k loan needs to be paid back immediately. Otherwise, it will be considered as a premature withdrawal if without an exception. When that happens, you will pay a 10% early withdrawal tax penalty in addition to the regular income tax. 2) Retirement: 401k is set up for retirement only, thus it’s not supposed to use for any other purposes but retirement. Especially considering there’s no guaranteed retirement income (except Social Security benefits) for you in the future, it’s ideally to fund 401k while you’re still working.
A better recommendation may be for you to find a trust worthy CFP® practitioner, who can help you build a budget and emergency fund so you won’t run into the “rob Peter to pay Paul” again. Best!
No, you cannot withdraw funds from your 401k without penalty to pay off debts, but you can borrow against your 401k to pay off a high interest rate debt and then pay back the debt from your 401k at possibly a much lower interest rate that could result in less interest over time. I’m not passing any judgement but the real question that needs to be answered is how did the 40k in credit card debt happen? If you borrow from your 401k to pay off the credit card debt what will keep the same thing from happening again? I would suggest you seek out a budgeting class, which are many times offered through local churches. We have a Budgeting and Debt Elimination Coach on our staff - you can view information by clicking here or contact us for more specific information about your situation.
It would be prudent for you not to do this. Not only will you be paying the 10% penalty but also have the tax bill to pay at the end of the year. You may want to look into a debt consolidation loan with a local bank or an online lender like SoFi. While you're only transferring the debt over, it could potentially lower the interest rate your paying and be better in the long run. Just remember, paying that amount of debt is a marathon, not a race.
This is a great question. I would be curious if you are still working for the company for which this 401(k) is held. For the purposes of answering the question, we will assume that you are still working for this company.
You would not be able to withdraw the funds and avoid the 10% additional penalty according to the facts you outline above. Here is a great article from Investopedia that outlines the rules for withdrawals: How do you withdraw money from your 401(k)?
You may want to consider taking a loan. First, you would need to check with the plan administrator to see if loans are available. If they are available, you would typically be able to borrow up to 50% of your account balance up to a total of $50,000. I would expect it to be at a rate significantly lower than what you are currently paying on the credit card debt. I would read this article on the topic: Sometimes It Pays to Borrow from Your 401(k) Be sure to make yourself familiar with the potential pitfalls of this as well.
Based on what you outline above, I would explore using the loan as a first option and look at a withdrawal second. Good luck in navigating this decision.