paying off debt with your 401K has come up many times at Financial Elite. I have made the mistake of doing that myself and it is a mistake. I had done it more than once and had to pay taxes through the nose each time I did that.So if you are planning on cashing out your 401K to pay off debt...Don't do it!
You will end up being taxed a total of 40 percent on the amount that you cash out. It's basically like taking out a loan at 40 percent. But if you are absolutely heart set on taking out money from your 401K account to pay credit cards or other debt, you will need to put aside at least 30 percent of what you take out to pay the taxes on the withdrawal the following year. If you don't, you will now have a bigger mess with the I.R.S. because you will owe them money next. If you have already done this you may want to reconsider. You have 60 days to re-invest the money. If you do so then it is almost like it never happened.
Why do you feel you need to take out money from your 401K anyway? Are you choosing the quick and easy path? Let's say you owe $8,000 in credit card debt, you may want to look into getting a second job for a few months. If you can make an extra $1,000 a month, you can have that debt paid off in about 8 months. The alternative is to take out the money, pay off the debt, and probably owe the I.R.S. $4,000 or more the following year.
Cashing out your money could end up being a mistake that costs tens of thousands of dollars in the long run. Like we say around here...All you have to lose is your debt, but in this case we might say...All you have to lose is your retirement.
[This post is written and copyrighted by Financial Elite (http://financialelite.blogspot.com/ ).]
We Also Suggest: