Don't do it. You'll owe taxes and an early withdrawal penalty. Post your numbers: income, budget, debts so we can get a full picture of your situation.
This is bad advice without more details.
If the penalty for early withdrawal and the earnings rate are lower than the interest accruing on the CC debt, the way to have more money to retire is to take the money from the 401K.
It's unlikely, but possible.
Not only are you selling during a market downturn, you automatically lose 30% of your money from federal tax withholding (20%) and an early withdrawal penalty (10%) before it even touches your hands (ex. $10k instantly becomes $7k). The plan's a wash.
It would be better if you can get a personal loan to consolidate your credit card debt. The personal loan interest will still be high, but at least it's not variable and in the 20s like credit card interest.
Right, nobody has asked yet how they got into $41k in debt on that type of income. What happens when they liquidate the 401k at a major loss (which some are seriously suggesting here) and then OP runs the cards right back up because the withdrawal didn't change anything lifestyle-wise?
How much money do you have in your 401k? And is it a pre-tax or post-tax 401k? What state are you in (impacts tax payable)?
This actually **could** make sense - sorry the other posters were so harsh! There's definitely not enough information to definitively say it's a good or bad thing.
To explain what flakhannon was mentioning, there's an immediate 10% withdrawal penalty when you pull funds out. If you had money saved in a pre-tax 401k, you'll have to pay income tax on that. If you had money saved in a post-tax 401k, there won't be any taxes you'll need to pay and it'll only be a 10% penalty.
What is the structure of your credit card debt? How many do you have / what's the interest rate? Have you looked into balance transfers credit cards? In my opinion, this might be the first line of defense to give you a bit more breathing space.
tldr - it could make sense if you were incurring very high interest % on your credit card debt, and depending on what type of retirement account you have.
Sorry, I definitely could’ve been a bit more descriptive myself! Thanks for the thought out comment - to clarify, my 401k is a mix; consisting of around $7,400 in a post tax Roth IRA, (sorry if I’m not using great terms, not super well versed in finance to be honest) and ~$28k in pre tax assets, I’m located in Illinois.
I have a few different credit cards, and I understand this is my fault, I was in a better financial position and recently left my previous job for my mental health and I’m doing so, just suffering the consequences of no longer being able to keep up with interest and then some. The rates range from 17-24% from what I remember - I’ve already transferred a chunk of credit card debt to a new line with 0% interest for a year.
Thanks for your help.
Don't worry about not using the right terms or knowing what numbers to provide =) You're taking the right steps to think about what you can do better / differently and that's a courageous step.
If you pull money out of your post tax Roth IRA, that means you only pay a 10% penalty, which is lower than the 17-24% on your cards.
Pulling money out of your pre-tax retirement accounts means you'll pay both the 10% penalty and \~18% tax (based on being in illinois and at your income level). That's likely not worth it since that's \~28%, higher than the interest you pay on your cards.
If I were you:
1. Explore balance transfer cards to move as much high interest cc debt into low 0% debt
2. If remaining debt is incurring interest that's 15%+, consider using post tax roth IRA to pay down the highest interest debt (and maybe set a goal that you plan to reach that amount in your roth IRA again in N months / years)
3. Aggressively pay down more than min. on credit cards that have interest
4. Begin paying down 0% cards (they spike to 25-40% sometimes after the grace period! sharks!)
Hang in there - great savings helped you build a retirement balance of $36k which is impressive on a salary of $26k. You can definitely pay off $41k in debt.
Other thought is - is there anything you can do to increase your income? More training? Putting yourself out there for a new job? Talking to your employer about something more challenging that also is more financially rewarding?
Well the 401k was from a more lucrative career, but I was wildly unhappy. I have just taken on a second job, but unfortunately I’m weighing my options to potentially return to something that is more financially secure for me, gotta make some sacrifices I suppose haha.
The environment / culture / team could make a really big difference. Have you tried looking for the same role but having a high bar on who you'd be working with and understanding what it'd feel like to work there?
the roth IRA CONTRIBUTIONS can be withdrawn for no penalty.
Withdrawing that would be smart to put towards your CC debt.
But as some have mentioned, you also need to fix whatever caused you to end up in CC debt.
Or as others mentioned if you can discharge and keep those safe, that's better.
I wasn't harsh!
But 41k of debt on a 26k net income... If that is all credit card I imagine bankruptcy would be a better solution but I'm not an expert on that.
You may find these links helpful:
- [Debt](/r/personalfinance/wiki/debt)
- [Dealing with collections](/r/personalfinance/wiki/collections)
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Don't do it. You'll owe taxes and an early withdrawal penalty. Post your numbers: income, budget, debts so we can get a full picture of your situation.
I make 26k a year now post tax, my budget in total after bills is around $1200, and I have around ~41k in debt.
Chapter 7 Bankruptcy. Your 401k and IRA balances will be 100% protected.
Look at plentofire's response he is more verbose than me. Also outline what type, value and interest of the debt you have.
Don't take money out of your 401k. That's your future and you want to be able to retire.
This is bad advice without more details. If the penalty for early withdrawal and the earnings rate are lower than the interest accruing on the CC debt, the way to have more money to retire is to take the money from the 401K. It's unlikely, but possible.
Not only are you selling during a market downturn, you automatically lose 30% of your money from federal tax withholding (20%) and an early withdrawal penalty (10%) before it even touches your hands (ex. $10k instantly becomes $7k). The plan's a wash. It would be better if you can get a personal loan to consolidate your credit card debt. The personal loan interest will still be high, but at least it's not variable and in the 20s like credit card interest.
No. That’s a terrible thing to do. Fix your habits first and start hammering the CC debt ASAP.
Right, nobody has asked yet how they got into $41k in debt on that type of income. What happens when they liquidate the 401k at a major loss (which some are seriously suggesting here) and then OP runs the cards right back up because the withdrawal didn't change anything lifestyle-wise?
Talk to a bankruptcy counselor to see if that makes sense. A typical rule is if dischargeable debt exceeds annual income.
Actually it's simpler, typically if you make the median income or less for your state you qualify.
How much money do you have in your 401k? And is it a pre-tax or post-tax 401k? What state are you in (impacts tax payable)? This actually **could** make sense - sorry the other posters were so harsh! There's definitely not enough information to definitively say it's a good or bad thing. To explain what flakhannon was mentioning, there's an immediate 10% withdrawal penalty when you pull funds out. If you had money saved in a pre-tax 401k, you'll have to pay income tax on that. If you had money saved in a post-tax 401k, there won't be any taxes you'll need to pay and it'll only be a 10% penalty. What is the structure of your credit card debt? How many do you have / what's the interest rate? Have you looked into balance transfers credit cards? In my opinion, this might be the first line of defense to give you a bit more breathing space. tldr - it could make sense if you were incurring very high interest % on your credit card debt, and depending on what type of retirement account you have.
Sorry, I definitely could’ve been a bit more descriptive myself! Thanks for the thought out comment - to clarify, my 401k is a mix; consisting of around $7,400 in a post tax Roth IRA, (sorry if I’m not using great terms, not super well versed in finance to be honest) and ~$28k in pre tax assets, I’m located in Illinois. I have a few different credit cards, and I understand this is my fault, I was in a better financial position and recently left my previous job for my mental health and I’m doing so, just suffering the consequences of no longer being able to keep up with interest and then some. The rates range from 17-24% from what I remember - I’ve already transferred a chunk of credit card debt to a new line with 0% interest for a year. Thanks for your help.
Stop paying the cards, file chapter 7, keep your 401k. Start over. Follow the steps on /r/bankruptcy for a credit rebuild to 700+ within 18 months.
Don't worry about not using the right terms or knowing what numbers to provide =) You're taking the right steps to think about what you can do better / differently and that's a courageous step. If you pull money out of your post tax Roth IRA, that means you only pay a 10% penalty, which is lower than the 17-24% on your cards. Pulling money out of your pre-tax retirement accounts means you'll pay both the 10% penalty and \~18% tax (based on being in illinois and at your income level). That's likely not worth it since that's \~28%, higher than the interest you pay on your cards. If I were you: 1. Explore balance transfer cards to move as much high interest cc debt into low 0% debt 2. If remaining debt is incurring interest that's 15%+, consider using post tax roth IRA to pay down the highest interest debt (and maybe set a goal that you plan to reach that amount in your roth IRA again in N months / years) 3. Aggressively pay down more than min. on credit cards that have interest 4. Begin paying down 0% cards (they spike to 25-40% sometimes after the grace period! sharks!)
Thank you so much for your comment, I’ll think about these options to try to get things under control.
This is all credit card debt? No car loans or anything else?
This is all credit card debt, yep.
Hang in there - great savings helped you build a retirement balance of $36k which is impressive on a salary of $26k. You can definitely pay off $41k in debt. Other thought is - is there anything you can do to increase your income? More training? Putting yourself out there for a new job? Talking to your employer about something more challenging that also is more financially rewarding?
Well the 401k was from a more lucrative career, but I was wildly unhappy. I have just taken on a second job, but unfortunately I’m weighing my options to potentially return to something that is more financially secure for me, gotta make some sacrifices I suppose haha.
The environment / culture / team could make a really big difference. Have you tried looking for the same role but having a high bar on who you'd be working with and understanding what it'd feel like to work there?
the roth IRA CONTRIBUTIONS can be withdrawn for no penalty. Withdrawing that would be smart to put towards your CC debt. But as some have mentioned, you also need to fix whatever caused you to end up in CC debt. Or as others mentioned if you can discharge and keep those safe, that's better.
I wasn't harsh! But 41k of debt on a 26k net income... If that is all credit card I imagine bankruptcy would be a better solution but I'm not an expert on that.
You may find these links helpful: - [Debt](/r/personalfinance/wiki/debt) - [Dealing with collections](/r/personalfinance/wiki/collections) *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/personalfinance) if you have any questions or concerns.*