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Weekly Tips

Don't Tap 401(k) to Pay Off Debt

Are you thinking about tapping your retirement funds to get rid of lingering credit card debt? If so, don't do it, and here's why:

While racking up too much debt on credit cards may be one of the worst financial moves a consumer can make, raiding retirement funds to dig out of debt ranks high on the list of financial "no-nos" as well.

Not only will you pay penalties and taxes that could reach nearly fifty percent of the total withdrawal, but you'll also lose out on all the tax-deferred returns you could have made on your original investment. Assuming an annual return of 8 percent, a $20,000 withdrawal from your 401(k) thirty years before retirement could cost you over $200,000 in lost retirement income!

Also, in the event of a bankruptcy, unsecured debts can be reduced or completely wiped out while retirement funds remain protected from creditors. So if you've tried everything and still can't figure out how to pay off your credit card debt without tapping retirement funds, now is the time to consider speaking with a reputable credit counselor or a bankruptcy attorney regarding your options. In the meantime, leave those retirement savings where they are.

on Tue, 2010-04-06 17:00