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Can anyone tell me under what circumstances it makes sense to cash out a 401k to pay off debt?

Welcome to TMF! Our purpose is to educate and amuse, and from time to time we even offer lucrative financial advice. I hope you'll be a member for a long time.

Cannibalizing your retirement funds to liquidate debt is a desparation move that you should reserve for only the most dire circumstances. My idea of dire circumstances is Bubba is breaking down your front door and offering to break your kneecaps if you don't come up with some cash right now. I'd live in a cardboard box under and overpass and eat cold beans from a can before I touched my retirement funds.

The reason for my attitude is retirement money is hard to accumulate and VERY expensive to tap prematurely. The rules for getting money into retirement accounts are strict, and there are almost no opportunities to replace retirement money once you withdraw it. To withdraw money from a retirement account prematurely requires paying a 10% penalty plus regular income taxes. Depending on your personal financial situation, you may discover you only get 50¢ of each dollar you withdraw.

Sometimes it's possible to arrange a short-term loan from your 401(k). However, the interest you'll pay yourself on the loan is much less than what you can earn on investments. Additionally, the loan become due immediately if you leave your employer (for example to accept a better job elsewhere).

I recommend you start by reading the TMF series of articles on getting out of debt. You can jump to the head article from this link:

TMF has a Credit Center. Information there ranges from how to read your credit report to how to respond to identity fraud. You can jump there from this link:

Then look through the information on credit at the Federal Trade Commission web site. You can jump there from this link:

Of particular interest is this document, which describes your rights under the Fair Credit Reporting Act. It takes a minute or two for the document to load -- be patient:

This article from the Federal Consumer Information Center describes how to dispute inaccurate information in your credit report:

I also recommend you read the Fannie Mae (FNMA) and the National Endowment for Financial Education jointly produced guide, "Knowing and Understanding Your Credit." You can get a copy at this link:

You may also want to spend a few minutes prowling through the Fair, Issac & Company web site. (Fair, Isaac provides client companies with financial services "decision-making solutions." FICO is an acronym for Fair, Isaac & Co):

Buried deep in the Fair, Isaac web site is a chart showing the distribution of scores among the general population. To get to that chart, go to this web site and click on the "How do People Score?" link (about 1/5 down the page on the right-hand side):

If you think you'd like to hire a credit counseling service then I recommend you read this TMF article:

You should be able to find a service to help you in your community for little or no cost. As always, the best way to find professional consultants is ask for recommendations from family, friends, and business associates. Good places to look are with your own employer (some companies offer financial planning services as a benefit of employment) and your clergy or lay leader in your congregation.

If you have trouble locating a service to help you rehabilitate yourself, try surfing over to the National Foundation for Credit Counseling (, Consumer Credit Counseling Services (, and Consolidated Credit Counseling Service ( The National Foundation for Credit Counseling is an umbrella organization that certifies other credit counseling organizations. Consumer Credit Counseling Services is a member of the National Foundation for Credit Counseling, and credit counselors seem to recommend them often for their combination of responsible advice, good service, and reasonable fees. Consolidated Credit Counseling Services is NOT certified by the National Foundation for Credit Counseling, but credit counselors seem to recommend them a lot. I emphasize that I don't have personal experience with any of these organizations; I'm repeating information I've collected over the years.

If you want to check the credentials of a commercial service, a good place to start is with your local Better Business Bureau. You can find their address and telephone number from this web site:

If you still have questions, then I recommend you post them on TMF's Consumer Credit / Credit Card discussion board. You can jump there from this link:

In case you need the information, the "big three" credit bureaus are:

-- Equifax (, P.O. Box 740241 Atlanta, GA 30374-0241; report fraud by calling (800) 525-6285 and writing to the address above; and to order a credit report, (800) 685-1111.

-- Experian (formerly TRW,, P.O. Box 1017 Allen, TX 75013; report fraud by calling (800) 301-7195 and writing to the address above; and order a credit report, (800) 682-7654 or (888) 397-3742.,

-- Trans Union ( P.O. Box 390 Springfield, PA 19064; report fraud by calling (800) 680-7289 and writing to Fraud Victim Assistance Division, P.O. Box 6790 Fullerton, CA 92634; and order a credit report, (800) 916-8800.

David Jacobs
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