Paying off debt with 401k

Hi I recently got a new job, and will have to roll over my 401k to my current employer. I have 36k in my 401k and During the process it allows me to take out money although it’s a 20% state tax , I do have 7k in debt that I would like to get rid of. Do you recommend during the rollover period to possibly take a portion of my 401k out to pay off some of my debt or to just roll it over without touching it ?

So I am guessing that you are hoping to use the CARES Act to save from paying the 10% penalty- this would only be available if your employer signed up for it. But the truth is you would never want to pay 20% tax on money that you are investing in your future. If this new job comes with a pay increase use ALL of that to kick that 7k to the curb!

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@beachfamily is right again! Don’t rob you retirement account to pay off your debt. Just go HAM on the debt. Once you have no debt, convert those debt payments to investing and you’ll be off to the races building wealth! :slight_smile:

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Does your answer change IF the investments are only about $12K but debt is $80k?

Here is why I’m considering taking the $12 K to pay debt
-My new job comes with a very high security clearance and I don’t want the two items (totaling 10K) on my credit report to impact me. The $12K would go to paying off charge offs and could be done quickly

-My new employer does not match my 401k until I have been there 1 year

-I’m 44 and want to use this next year to kill as much debt as I can


Hi @KayF! The answer does not change - what Jeremy wrote above still very much applies. When the question above was asked, the penalty for taking money out of a 401k before retirement was being waived due to covid. But that’s no longer the case. So if you took money out of your 401k, you would pay a penalty and tax.

For the new job, it would be nice to know if they did actually care about how much debt you have. From my experience with jobs that have high security clearance, they don’t care necessarily about total debt, but rather look for any unusual patterns as well as any bad marks on the credit report. If you do have those, paying off the debt won’t make them go away any faster. With all that said, I can’t speak specifically to this situation since these types of clearance checks I know can be unique each time.

I hope this was helpful and sorry if that’s not the answer you were hoping to hear!

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Thank you for the answer! I went into my Brokerage account and the sheer shock of what my account had lost AND playing around with the tool to see what the penalty would be quickly made me abandon that idea. I can’t fathom giving that money away!

Thanks so much for the response!

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