Don’t Cash Out Your 401k | Debt Consolidation Part 7

Fight the temptation

If you want to see your name on a cake like this someday, don't cash out your 401k.

If you have a 401k, you may think that cashing it out to pay off your debt is a logical idea. It’s your money, right? And why let it sit there and collect dust while you are struggling?

I’ll tell you why: So you can retire someday. And debt consolidation will not be an option when you have no income.

Paying the price

People often think they will save money by cashing out their 401k. They figure if they pay off their debt right away, they’ll save on interest. However, cashing out a 401k is a very costly venture.

401k funds are heavily taxed. Plus, there are hefty financial penalties in the form of fines if you cash it out early. Furthermore, you are earning interest and possibly matching payments from your employer on that fund. Any extra money you would have earned while trying to build it back up will be lost.

Can’t fight the future

Think of it this way: Say you cash out your 401k right now and pay off your debt. You’re even-steven, but you have to start all over to build up your 401k again. Chances are, when the time comes around that you planned to retire, you’ll find that you do not have enough money in the fund. You’ll either have to keep working or live in poverty.

How a debt counselor will help

When you sit down with a debt counselor, you will come up with a financial plan. Not only could you save money on interest, you will know how soon your debt will be paid off. If you leave your 401k intact, you can leave your future retirement plans undisturbed and pay off your debt at the same time.