Ask Terry Questions 401k Cashout

401k Cashout

By Terry Savage on April 02, 2024 | Credit/Debt

Hi Terry,
I’ve heard you on the radio and I was hoping you’d be able to help me with this question. I’m 47 years old and SUCK with money. I took out a loan about a year ago to consolidate my credit cards and pay them off. (Great idea, right?) I started using them again. 😢 So now, I’m paying 638.00 a month for the loan, plus the minimum payment on the other cards which is about another 600.00ish. I left my last job with my 401k balance of 16,000.00 and was going to roll it over into my new 401. I was thinking it would make more sense to cash it out, pay off what I owe on the additional spending of the cards, cut them up, and hopefully that will raise my credit score because right now with it being over extended, I’m only at 623. I know I would be penalized, but I am still thinking it would be worth it, just to save the extra money that’s killing me monthly, and really getting me nowhere. PLEASE help me.

Thank you so much!

Terry Says

This is a terrible idea.
First of all, you likely won’t get enough money to solve your problems. You’ll pay ordinary income taxes on it (so roughly 30% will go in taxes) and another 10% penalty for withdrawing before age 59. So figure about half will go to the government. AND, you’ll lose all future growth.

But, second, and most important, you already know you can’t trust yourself! You got one break with the consolidation– and you couldn’t discipline yourself to close and not use the old cards. This is like an alcoholic promising not to drink again! Without a structured plan, this will be a huge waste.

Please call the National Foundation for Credit Counseling at 800-388-2227. This non-profit can help you understand your problem and structure your repayment. Please let me know what develops.

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