401K Withdraw for Credit Cards?

[wkeber]

Hello - I have a fairly fundamental question but I can't seem to find another post that answers my exact questions. I'm trying to figure out how to calculate accurately the opportunity cost for closing/withdrawing my 401K to pay off CC debt or if I should roll over to a new 401K and keep saving. 

Here is my CC situation: 

$3500 - MasterCard 14% APR

$10k - AMEX, interest free until October, then approx 12% APR

Here is my 401K situation:

$14,000 vested balance

Figure I'd get about $8,100 after penalty and taxes

My plan would be to pull the $8,100 and pay off the MasterCard in full, and put the remainder against the AMEX and pay off the balance before October to avoid paying the interest on that 0% balance. 

I make pretty good money - $200k/year, so I technically can put a substantial amount toward CC each month. But I like the idea of paying most of it off right away (it makes sure I do it... the reality is that each month I think: "oh, I can just pay more on CC next month" so it never really happens.

I can't get a sense of the opportunity cost of doing the 401K withdrawal now or just keeping the 401K in place and using my regular salary cash to pay off the CCards. 

Thoughts? 

[youdontkillmoney]

Can you borrow from your 401k, that is an option too.

If you borrow you do not get a tax hit, you pay interest back into your account, and only lose money if the interest is less than the investment returns you could have earned if you kept the money in, so if you pay 5% interest and you could have earned 10% return by not borrowing from the 401k, then you lose the 5 percentage points (10%-%5) you could have earned in returns.

If you withdrawal, you pay taxes, so you never earn a return on the entire withdrawal, and you also lose any potential returns if you kept the money in.

In either case above, if you are paying 22% in credit card interest and take money out of the 401k, you are savings in high credit card interests, since your "return" is the savings from 22% interest.

if you have a low tolarance for debt paying it off with 401k money is an option.

One can go into a more detailed analysis and compare the differences in the above scenarios, take the present value (discount cash flow analysis, etc) but that is the gist of it above, generally.

[Anonymous]

With your annual income, I would use it to PIF your 2 credit card balances. Then roll over your current 401k and continue to save money. Hopefully, taking this route will force you to start PIF your credit cards each month.

[Anonymous]

When you repay a 401(k) loan you do so with after tax dollars. It will also be taxed on the way out (assuming it's traditional pretax) at retirement. It's better than taking a withdrawal that generates a 1099r, however. just things to consider.