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Columns | Go Far With Kovar

Using 401(k) Funds to Pay Down Credit Card Debt

by Taylor Kovar

July 27, 2022

Hi Taylor - I'm 24 and in a bit of a dilemma. I've got around 20,000 dollars in my 401(k), but I also have about $16,000 in credit card debt (I know, I know). Would it be a good idea for me to take the money out of my 401(k) and pay down this debt? The interest is starting to pile up and I'm worried it'll haunt me forever.

Hi Lisa -
I wouldn't say it's a good idea. My gut reaction is to yell "Nooo!" Taking the penalty on an early withdrawal is a brutal loss of money, but I understand that there are many factors at play and different ways to look at this situation.

A good way to think about this is to consider what's going to happen next. By taking a massive tax penalty and losing your retirement savings, are you going to kill off your debt, stay out of debt and immediately start rebuilding your 401(k)? Or will this be a partial fix that doesn't actually solve your problems and just ends up being a setback?

If your credit card debt is significant enough that you can't afford the minimum payments and the interest just keeps piling up, you need to do something about it. Drawing from a retirement account should always be your last resort; if you can pay down your debt while continuing to save, you'll eventually reach a turning point where the debt is going down faster and your savings are working for you. Can you cut corners elsewhere? Spend less, trade in your car for a cheaper model, look for a second job? All of those options are preferable to spending your savings and absorbing a 10% penalty.

More often than not, I believe there's a way to make or save that you haven't thought of yet. You may also just feel overwhelmed by the debt, but making timely payments and putting as much toward your credit cards as possible will alleviate that feeling. It's easy to look at the money in your retirement account, because it's just sitting there, unused. But that's exactly where you want it to be.

If there's nothing else you can do and you're headed toward collection calls and even harder times, you can think about drawing from your 401(k). Just remember, if you go this route, you have to work even harder to save and avoid falling back into debt. Retirement is a long ways away for you, but the earlier you start saving, the better off you'll be. Good luck, Lisa!
Taylor Kovar July 27, 2022
More "Go Far With Kovar"



Legal Disclaimer: Information presented is for educational purposes only and is not an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. To submit a question to be answered in this column, please send it via email to Question@GoFarWithKovar.com, or via USPS to Taylor Kovar, 415 S 1st St, Suite 300, Lufkin, TX 75901.


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