Q: My wife recently left her job last year due to health problems. We are doing okay on one income. If we cash in her 401(k) retirement account we could pay off about 80 percent of our high-interest $14,000 credit-card debt.
Would it be worth it to pay the penalties and rid ourselves of this debt or should we take the long road, endure the high interest rates on the unsecured debts and pay them off over time?
A: Generally it's not wise to use an appreciating asset (the retirement account) to pay for depreciating goods and services (the credit-card debt). Once you cash it in it's done growing. If you leave it alone, that account--as small as it appears right now—will continue to appreciate over time to be there in your retirement years.
The big problem with your idea is what cashing in now will cost. First, you will never see 10 percent because it will be deducted as a penalty for early withdrawal. Then, you'll owe federal and state income tax on the full amount. At least 40 percent of her account balance will vanish.
See this account as a valuable asset that is simply out of your reach for now. If you put yourselves into rapid repayment mode, you can wipe out those high-interest credit-card accounts quickly, even if all you can pay are your minimum monthly payments each month.
Excerpted from Can I Pay My Credit Card Bill with a Credit Card? And Other Financial Questions We're Too Embarrassed to Ask! (DPL Press, Inc., 2009)
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