Phil's Personal Finance Tip of the Day:
Why You Shouldn't Dip Into Your 401(k)
Dear Dave,
Is it a good idea for a married couple in their early thirties, who have a lot of student loan debt, to cash out one of their 401(k)s to pay it off?
-Marcy
Dear Marcy,
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% penalty, plus your tax rate. If you make $75,000 a year, that puts you in a 25% tax rate, plus the penalty. That’s a 35% 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 okay to borrow money at a 35% 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, Marcy. 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!
- Dave
Inspirational Quotes@Inspire_Us from Twitter:
You cannot push anyone up the ladder unless he is willing to climb. - Andrew Carnegie
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