Is taking from my 401k to clear credit card debt a bad move?

Seeking Advice
1

I’m stuck trying to figure out what to do next and open to any suggestions. My financial situation changed last August. I’ve been managing bills for the most part, but I have a Chase Sapphire Reserve card that’s suspended. I haven’t used it since July, but the balance is now $13,057, with over $2,000 in fees added since October.

I made payments from October to December, but they were under the minimum, so late fees kept piling up, and my credit took a hit. Chase wants $730 to bring the account current, plus minimum payments after that. They wouldn’t offer me a reasonable payment plan, and I’m worried about losing my security clearance (and job) if they close the account and sue me. Filing for bankruptcy isn’t an option for the same reason.

I’m 28 and just started saving for retirement. I have $24k in a 401k from a past job (now contributing to a TSP at my current job). I’ve already dipped into the 401k for smaller amounts to stay afloat, but I’m considering clearing the card balance entirely. My income is expected to go from $54k to $86k in six months, but that’s only if I keep my job.

Update: My spouse just got offered a job paying $70k, which will help a lot. Once we have a steady income again, I’ll reevaluate my budget and focus on paying off this debt.

2
  1. Stop taking small amounts from your 401k.
  2. If you decide to use it, take enough to wipe out the debt.
  3. Clear the Sapphire balance entirely.
  4. Don’t get another credit card. It seems they don’t work for you.
  5. Build an emergency fund—aim for $2,000.
3

@Casey
Saving is definitely the plan! It’ll be easier once we have two incomes again.

4

@Casey
Good advice.

5

Honestly, I’d just take the money out of the 401k to get rid of this debt. You’ll get penalized, but you’re young and have time to rebuild.

6

Lin said:
Honestly, I’d just take the money out of the 401k to get rid of this debt. You’ll get penalized, but you’re young and have time to rebuild.

Completely agree with this.

7

Lin said:
Honestly, I’d just take the money out of the 401k to get rid of this debt. You’ll get penalized, but you’re young and have time to rebuild.

If you can take it as a loan, there’s no penalty.

8

@Tavis
Most plans don’t allow you to borrow everything. It depends on how much is vested.

9

Frankie said:
@Tavis
Most plans don’t allow you to borrow everything. It depends on how much is vested.

401k loans usually let you take up to 50% of what’s vested.

10

Blair said:

Frankie said:
@Tavis
Most plans don’t allow you to borrow everything. It depends on how much is vested.

401k loans usually let you take up to 50% of what’s vested.

Right, so it’s not like you can take out the entire balance as a loan.

11

Lin said:
Honestly, I’d just take the money out of the 401k to get rid of this debt. You’ll get penalized, but you’re young and have time to rebuild.

Agreed. 28 is still young enough to start over if you learn from this.

12

If clearing the debt means taking from your 401k, do what’s best for you. Credit cards with high interest rates are brutal. Just make sure that once the debt is paid off, you start putting that money back into savings. Maybe look into personal loans first.

13

I used a 401k loan to clear credit card debt too. The key is not to use the card again after it’s paid off. If you can do that, it’s a good move.

14

Toby said:
I used a 401k loan to clear credit card debt too. The key is not to use the card again after it’s paid off. If you can do that, it’s a good move.

I’ve already stopped using the card, so I don’t think that’ll be a problem.

15

@Joss
That’s good to hear. I just wanted to share because I learned the hard way!

16

You’re risking your future to cover past spending.

17

Penn said:
You’re risking your future to cover past spending.

My current lifestyle isn’t above my means, but my past spending was. My spouse losing their job and paying for two houses temporarily didn’t help either.

18

@Joss
If your bills aren’t paid, it’s still above your means.

19

Zephyr said:
@Joss
If your bills aren’t paid, it’s still above your means.

Do you have any advice that’s actually helpful?

20

Joss said:

Zephyr said:
@Joss
If your bills aren’t paid, it’s still above your means.

Do you have any advice that’s actually helpful?

You should downgrade your CSR to a CFU. You can’t afford the annual fee.