Dollars and Cents: Should I Use Old 401k to Pay off Credit Card?

Welcome to the first installment of “Dollars and Cents“. This is a new segment where I’ll be answering reader questions using video with a bit of humor.

It’s part of my life mission of making personal finance fun. :)

If you have a question that you want answered, be sure to use our contact form here.

Here’s the first reader question:

So I am currently in college and working full-time. I took out student loans to cover the cost of tuition however, I had about $1300 in expenses that were not covered by that and had only a few days to come up with the funds. I put the charges on my credit card.

I have a 401K from my previous employer that I was planning to rollover into a Roth Ira. However, I am wondering if it would be better to cash out the 401K to pay down the credit card and then put the remaining balance in the IRA. I know that the fees/taxes are probably ridiculous. I just don’t know if it is better to do that or to leave the balance on the credit card and pay it down over several months.



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Comments | 2 Responses

  1. says

    Good advice Jeff. I get a knot in my stomach when I see someone contemplating paying off debt (unsecured even more so) with their 401K.

    Yes, the 10% IRS penalty and the loss of compounding over time is enough reason in and of itself to not go the 401K route.

    The reader can focus on the credit card with the highest finance charge rate as priority to pay down the cards.

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