Sat. Feb 4th, 2023

Dear Quentin,

I’m 41 years old, father to two lovely teenage daughters, and married to my second wife for a little over a year. I’m sitting on about $10,000 of credit-card debt, and I’ve still got about $4,500 to pay off for my student loan. Our combined income is just about $100,000 a year.  

I’ve got an arguably small amount of money invested in a 401(k), currently sitting at about $24,000. I keep having this thought that things would be a LOT more comfortable if I just paid off my debt with a piece of that retirement fund.

I know there are penalties and taxes, but the idea of this money just sitting there, doing nothing at all for me is just really making me itchy. I have at least another 25 years of work ahead of me. I know this is a really dark thing to acknowledge, but who knows if I’ll live until retirement? Who knows how much my quality of life could improve by getting rid of this debt?

It seems like a solution to a problem, but it seems like universally, everyone is like, “DON’T TOUCH YOUR RETIREMENT!”

Another dark aside is that I have a grandmother in declining health in her late 90s. She will be leaving some money to me, and my 73-year-old parents also have a fully paid-for house and inheritance willed to me that inevitably will come at some point prior to my retirement. 

Don’t get me wrong, I’m not banking on these deaths, but just painting a picture of the circumstances in which I believe I’d be able to “pay myself back” with these inevitabilities.

What is the downside to this idea? Future me might not need this money as much as current me feels like he does.

Thanks so much.

401(k) Wondering

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Dear 401(k) Wondering,

If you withdrew that money from your 401(k), your future self would look back at your present self and say, “Thanks for nothing, mate.”

You need to look at how you got into $10,000 credit-card debt, ask yourself some tough questions, and figure out a plan with your second wife — congratulations, by the way — on how to get out of it. This you should both do together because it is holding you both back and, hopefully, you can reimburse your wife at a later date. 

The interest rate is a killer. I’ve written about people who have had $89,000 on 11 credit cards. They took extra jobs, ate grits and cut their cable. They did everything they could to slash their expenses and make a plan to pay off their debt aggressively. But robbing your 401(k) to pay your credit card is not the answer.

If you were to withdraw that $24,000 early from your 401(k) before age 59½, you would be charged income taxes on the withdrawal in addition to a 10% early withdrawal penalty. The amount you withdraw will be added to your 2021 income tax return. You are creating more problems in order to take the “easy” way out.

But as Bryson Roof, CFP, investment adviser at Fort Pitt Capital Group in Pittsburgh, told MarketWatch: “The biggest cost associated with taking a 401(k) distribution is not taxes, it’s the opportunity cost of missing out on the growth of those funds that could have compounded over 20, 30 or 40 years.”

We are living in the middle of a global pandemic when people are taking downtime, and you have a job. You don’t need to take lavish vacations or eat out in fancy restaurants. We can all take that advice. You’re not the only one tempted to spend their way out of an emotional and public-health crisis. We’re human.

But the satisfaction you get from breaking the back of this $10,000 credit-card debt will be worth it.

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