Credit Card Debt

If you are like thousands and thousands of Americans you’ve got significant credit card debt and also a 401(k) or an IRA.  If you phones are ringing constantly and it’s not your family or friends calling, it’s likely that you are getting harassed by credit card collection calls.

When these calls continue and continue you want one thing to happen  .  . .  MAKE THEM STOP!

Unfortunately one of the options many folks consider is taking the money out of their 401(k) or IRA to pay the credit cards.  That option is almost uniformly a terribly bad idea.  Here’s why:

1.  Social Security is bankrupt and we all know it.  The chance that it will be around for to fund our retirement is mostly a pipe dream.  Even if it still exists there is little chance that it will be in the form it exists today.  It’s even more unlikely that the money you receive (if any) will provide sufficient income for you to live on any reasonable level.  As a result, you really need to maintain any retirement accounts you have.  First, you’ll need them.  Second, it’s really hard to put money back into the retirement account.  If you’ve got money there don’t take it out to pay credit card debt.

2.  The cost to you to remove money from a 401(k) or an IRA is huge.  You will have to pay taxes on the money when it comes out (unless it is in a Roth IRA).  Additionally, you’ll have to pay early withdrawal penalties of 10%.  Ouch.  That is a significant cost.

Just as an example, assume that you have $30,000 in credit card debt.  You will have to withdraw approximately $46,000 from your 401(k) or IRA in order to pay the penalties and taxes.

3.  The money in your 401(k) or IRA is likely exempt from the reach of creditors both inside and outside bankruptcy.  If you file a Chapter 7 bankruptcy in Knoxville and have $46,000 in your 401(k) when you exit bankruptcy you’ll still have that amount of money.  However, you won’t owe the $30,000 in credit card debt.  The same is true if you file a Chapter 13 bankruptcy.

Whether you live in Knoxville, Sevierville, Maryville or Jefferson City, the analysis is exactly the same.  There is almost never a reason to liquidate your 401(k) or IRA to pay credit card debt