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Dave Says: Using a 401K to Pay Off Debt?

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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 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 okay 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, 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
 

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About The Author

Dave
Ramsey

Dave Ramsey is America's trusted voice on money and business. He has authored five New York Times best-selling books: Financial Peace, More Than Enough, The Total Money Makeover, and EntreLeadership. His newest book, written with his daughter Rachel Cruze, is titled Smart Money, Smart Kids. The Dave Ramsey Show is heard by more than 8 million listeners each week on more than 500 radio stations.