401k vs. Debt - need advice

[chupacabra24]

Hi, I'm new here, hope this is in the right section- I'm just really looking for some financial advice. I'll keep this as short as I can.

My wife and I just moved to a new state in order for her to pursue what is a potentially very lucrative job opportunity with the credit card processor that she was already working for. Basically, the more she works, the more she makes, with residuals and bonuses for signing on new clients.

So far to this point, she's made as much as we were making before together, and she wants me to stay at home and raise our 5-year old son instead of working.

My problem is, she's had a lot of unpaid out of state training lately that has severely cut into our budget, and while I'm sure that once she finishes up her training (later this month) she'll be making a lot more money, the bills that are approaching don't see it that way.

We have about $15,000 in credit card debt with credit cards issued by our bank (from medical bills), with one card at 9% and one at 10%, and even though we've been diligently working at paying them off- paying between 2-3x the minimum payment- the $130/month interest is kicking us in the teeth, especially now that she's had a couple of "light" checks due to the training, as she can't work the week that she's gone and can't really make as many appointments for the following week.

I have a 401k from my previous job that's currently around $27k, which is about $7k less than it was before the stock market fell. It's regained about $3,000 in the last year, but has sort of stalled.

My question is, would it be smarter to yank out my 401k, which let's face it, isn't really doing anything, and end up losing about 45%, to get the $15.5k and pay off the credit card debt? I'm trying to think of it in a 'bottom line' way- basically, the credit cards are costing us more than my 401k is going to make, and as soon as my wife can get her professional legs under her, she'll be able to make enough that we can save- especially if we don't have the credit cards around our necks.

However, I also know that this will be basically removing any security that we'd have (aside from using the cards again if we needed to, as we did before- we don't use them for purchases, only emergencies). But on the other hand, once my son starts school, I'll be able to go back to work.

But with the current bills coming up and her income not where it was in these previous months (and with us stuck going out of state again in 2 weeks for another week of training, which will again impact her income), it would be nice to eliminate (or come close to eliminating) a couple of our largest bills and be able to just keep an eye on rent and utilities and keep everything under control.

That's everything in a nutshell- am I crazy for wanting to drill the 401k well?

[red92s]

in a nutshell- am I crazy for wanting to drill the 401k well?

in a nutshell - yes.

[jIM_Ohio]

Don't rob the 401k to deal with the debt- why lose 45%... $130/mo is not 45% of what you make is it?

[swanson719]

Think of it like this. How much did you put into your 401K to get it where it's at? How well has the stock market done since 1945? There have been a few recessions since then, with Carter, Reagan, and now Bush/Obama, but it's grown for the most part. You're talking about cashing in $27K to pay off $15K. That's throwing away $12,000 for nothing. How long will it take to earn that back in a retirement account if you didn't have the credit cards? Take your estimate and add 6 months to a year to it, and that's realistic since you have a kid. How long will it take for the interest on the credit cards to hit $12,000? If you didn't pay a dime towards principle on your credit cards it will take 7 years for the interest to hit $12,000. If you keep paying off 2x to 3x the minimum, you'll knock them out in a couple years max, and end up saving yourself a lot of trouble, and your 401K will probably be up to $50,000+ after those 7 years too. Then you'd really be kicking yourself in the teeth looking back on it. You're doing the equivalent of spending $35,000 to pay off $15,000 if you look at it that way. Not a good idea.

[PetMom]

Putting medical expenses (I am assuming the deductible?) on a credit card?

Always work out a plan with a hospital to pay them out monthly - they even have little payment accounts that you set up with them - and they don't charge the high interest (at least not yet).

Of course if you did not have insurance for medical charging is what one is left to do or you would go to a 'charity hospital'.

More people probably are charging medical care and end up having to even toy with the idea of raiding the 401 or paying off the high interest debt.

The credit card bill will be around that you can pay - trying regain lost ground on wiping out your 401 is not a good thing to do.

[croland]

I agree with everyone who posted, don't tap into the 401k.

[rc1078]

Worst Mistake ccashing in my 401k. I could use it now!

[Alex_Adviser]

Generally it's not wise to use an appreciating asset (401K) to pay for depreciating goods and services (debts). Once you cash it in it's done growing. If you leave it alone, that account--as small as it appears right now—will continue to appreciate over time to be there in your retirement years.

The big problem with your idea is what cashing in now will cost. First, you will never see 10 percent because it will be deducted as a penalty for early withdrawal. Then, you'll owe federal and state income tax on the full amount. At least 40 percent of the account balance will vanish.

[anonymous_saver]

So far to this point, she's made as much as we were making before together, and she wants me to stay at home and raise our 5-year old son instead of working.

Ummmm is this what you want? Just the way you stated this, it concerned me. Also, is your child going to be going to school next Fall? Couldn't you work during the days (perhaps 30 hours a week) and be home for your son when he gets home? This way you could help pay down this debt.

Also, do not take your 401(k) money out! Do a direct rollover into an IRA, and don't touch it. Does your wife contribute up to her match in her retirement plan at work?

Good luck.

[PennySaved]

Stopping contributing to a 401k if you don't get a match is silly, but justifiable.

Stopping contributing to a 401k if you get a match is stupid.

Pulling existing money out of a 401k is absolutely nuts.