DAVE RAMSEY: Don’t cash out 401(k) to pay off debt

By Dave Ramsey

Q. Is it a good idea for a married couple in its early 30s with a lot of student loan debt to cash out one of its 401(k)s to pay off the debt?
A. No way. You never cash out a 401(k) or IRA to pay off debt, unless it’s to avoid a foreclosure or bankruptcy.
Let’s say you take $50,000 out of your 401(k). Do you know what happens next?
They’re going to charge you a 10 percent penalty, plus your tax rate. If you make $75,000 a year, that puts you in a 25 percent tax rate, plus the penalty.
That’s a 35 percent hit, and that’s how much of your money is going straight down the toilet.
Look at it this way: You wouldn’t ask me if it’s OK to borrow money at a 35 percent interest rate to pay off your school loans, right?
That would be ridiculous, and this is just as dumb.
There are no shortcuts when it comes to getting out of debt. Roll up your sleeves and get on a beans-and-rice budget where every dollar has a name. This will enable you to save money and pay off that debt.
Follow Dave Ramsey on Twitter at @DaveRamsey and on the web at daveramsey.com.