Should I tap my 401(k) to repay $47k of credit card debt at 29.99 percent APR?

Jim asks: My wife and I have over $70K in credit card debt. We can get a loan to pay off $23k over five years at just three percent, but we’re stuck with the rest. Here’s the kicker: All of our interest rates have jumped to 29.99 percent to get ahead of the new laws. We have over ten years until we retire and will have multiple sources of retirement income. Should we use money in our 401(k) to pay off this remaining credit card debt. Our combined income is $120k.

If I’m reading this right, you’d be taking out $47k from your 401(k) to pay down the high interest credit cards that won’t be rolled into the three percent loan. I am usually loathe to recommend anybody touch their 401(k), for several reasons, including the compound interest it accumulates, how important retirement savings are, and the 20 percent taxes and 10 percent penalty you’ll pay for an early withdrawal.

But when you’re facing $47k of credit card debt at 29.99 percent interest, I might bend the rules.

Here’s what we’re looking at:

To get the $47,000 you need to pay off those cards, you’ll need to cash out about $67,200 from your 401(k) (taking into account penalties and interest). That’s a loss of $20,200.

If you can find a way to pay off that balance within 32 months (two years, eight months), which would take about $2,100 a month, you’ll pay $20,150 in interest. If there’s no way you think you could achieve that, then tapping the 401(k) starts to look attractive.

Instead of cashing it out, however, a much better option would be to take a 401(k) loan. You can take the cash you need and repay yourself over time. If you can’t repay it, or leave your employer, however, the remaining balance will be treated as an early withdrawal and you’ll be responsible for paying the taxes and penalties. Still not ideal, but better than cashing out all together.

Good Luck!

David @MoneyUnder30