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Should my wife and I pay off our debt with our 401(k) or focus on building up the 401(k)?

We recently tried a business venture that did not work out. It left us with about $30,000 in credit card debit, a 9 percent personal loan for about $20,000 and no equity our house. We also have a 4 percent $250,000 mortgage and we also have about $100,000 at 5 percent school loans for my wife and kids. My wife and I both work and between us we can make the payments for everything but only paying the minimum. We are both 60 years old and we have about $110,000 in 401(k) savings. Should we use our 401(k) to pay off our debt and then focus on building up the 401(k)?

Debt, Retirement, Retirement Savings, 401(k), Real Estate
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I encourage you to preserve and protect the 401(k) funds. This is critical as you are more near to retirement than you have ever been. Stick to the original purpose for the retirement funds and keep them in place. Do not let strangers (credit card companies and faceless lenders) derail what you have been able to save. Also, any liquidations would be taxable, so you do not get to actually use all that seems to be there.

Let's tackle the debt. Resolve that, for the next year or two, you will live on an austerity budget and buy only the barest necessities. I suspect the credit card interest is the highest and that needs to be paid off first. You might transfer the balance(s) to promotional offers that provide 0% interest for 12-15 months. Know that if there is likely a transfer fee, that will essentially amount to interest but is usually only 3-4%. It is possible to find some with no transfer fee. Then aggressively pay off the principal of the $30,000 debt so it is clearly eliminated before the promotional offer ends. The personal loan is the next priority. Explore ways to refinance at a lower rate. Perhaps you can join a credit union that offers loans to members at less than the 9% you are currently paying. In any event, the money you are not spending by being on austerity goes to paying this down.

The 4% mortgage is acceptable and you need a place to live, so I would not consider this a problem. If there was equity in the home, I might suggest cashing it out and renting for a few years, but that is not the case. The kids need to each take their own student loan responsibilities and everyone pull together here. Not sure how much that leaves for your wife's loan, but it should be less than the full $100k.

As a final consideration, you might want to borrow from the 401(k) to pay off some of the debt, but that will just create another payment for you. And the removal of funds from the 401(k) will inhibit its ability to grow as it otherwise would. There is also significant risk associated with the possibility that your employment may end and the full loan will become due or be considered a taxable withdrawal.

Hope this helps and I wish you the best.

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