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To Pay Down My Debts: Cash Out My IRA or 401(k)?
We are advised to do all we can to pay down high-interest debt as fast as we can. But is it ever advisable to cash out a 401(k) or IRA to help reduce or eliminate such debt?
Experts say this rarely makes sense. You naturally want to avoid paying that high interest on your debt. But the money which you will lose by prematurely tapping your 401(k) or IRA far outweighs the interest on your debt. You’ll pay taxes on the withdrawals, as well as penalties, and you’ll lose future tax-deferred income from it. It’s usually a poor choice in the long run. And the younger you are, the worse the future losses are.
If you’ve already made this mistake and tapped your retirement account, try to rectify the situation. Make large monthly contributions back into it–as much as you possibly can. If and when you manage to max out these tax-deferred contributions, then you can put any remaining money into a taxable brokerage account.
For more information, read Liz Weston’s full article: