Use retirement money to paydown debt?
Hi Terry,
My 59 year old cousin is at a crossroads as to what to do. She pays a total of $1,500 in interest every month on an interest only loan and after all her other bills are paid, she has no money left to pay down the principal. She has $1.2 mil in a 401K and a 10 year pension at $5,000 per month that is available when she retires. Should she use some of her 401K money to pay down the principal?
Terry Says
First, you haven’t told me some important things. How much IS the principal on that loan — and what is the interest rate? Is it a “balloon” interest-only home equity loan that will come due in full at some point, and if so, when? And is she still working, and could she get another job part-time to pay down the loan faster?
She can’t withdraw 40l(k) funds without the 10 percent penalty until she reaches age 59-1/2. Even then I don’t advise the withdrawal because she will owe ordinary income taxes at her marginal rate, and she will lose all future growth of the money.
If she wants to write back with more details, I’ll be happy to be more specific.
