401K, IRA, Stocks Using 401(k) to Pay Off Debt: Should You Do It? Read the Article Open Share Drawer Share this:Click to share on Facebook (Opens in new window)Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Pinterest (Opens in new window)Click to print (Opens in new window) Written by TurboTaxBlogTeam Published Jan 20, 2011 - [Updated Feb 27, 2025] 7 min read Debt can have a significant impact on your emotional and financial health, so it’s only natural that you’d want to get out of debt by any means necessary. If you’re having a difficult time getting out from under that pile of bills, you may be considering using a 401(k) to pay off debt. While strategies like this can be effective, it’s also important to understand the potential risks. Learn more about paying off debt with your 401(k). We’ve put together a few money management tips to help you make an informed decision. Table of Contents Key takeawaysCan I use my 401(k) to pay off debt?What are the potential benefits of cashing out your 401(k) to pay off debt?What is the penalty for withdrawing your 401(k) early?What are the other disadvantages of withdrawing from your 401(k) early?What is the difference between a 401(k) withdrawal and a 401(k) loan?Alternative methods to consider for paying off debts Key takeaways You can make an early withdrawal from your 401(k) to pay off debt. Using early withdrawals to pay off debt may make sense in some scenarios. Early 401(k) withdrawals face a 10% penalty and additional income taxes on the amount distributed. You can make penalty-free early withdrawals if you qualify for an exception. Can I use my 401(k) to pay off debt? Technically speaking, cashing out a 401(k) to pay off debt is an option. You can withdraw money from your 401(k) at any point in time, but that doesn’t mean it’s necessarily the best decision based on your financial situation. If you’re new to having a 401(k), you may want to consult a financial advisor before you make any major decisions. Your advisor can give you personalized advice based on your financial situation. What are the potential benefits of cashing out your 401(k) to pay off debt? While it’s not necessarily a good idea for everybody to cash out a 401(k) to pay off debt, there are times when it makes sense. It’s important to consider the value of your retirement account, your income, and the amount of debt you have. If you have a massive amount of debt with high interest, making a 401(k) withdrawal to pay off debt could make sense. While there is a penalty for making an early withdrawal from your 401(k), that penalty might be lower than the interest you’d incur over the course of several months or years. Understandably, paying off debt as soon as possible is usually preferable, but you don’t want to sacrifice your greater financial stability or future to pay off debt. What is the penalty for withdrawing your 401(k) early? When you have any type of retirement plan, it’s important to understand the rules. Retirement accounts incentivize planning for the future, so withdrawing money before you retire typically comes with a penalty. If you withdraw from your 401(k) before you turn 59½ years old, you’ll typically face a penalty equal to 10% of the amount of the withdrawal. You’ll also have to pay your current income tax on any money you withdraw from your 401(k). When you wait until 59½ to withdraw from a 401(k), you typically have less taxable income. This results in lower income tax rates, which means you can save on income taxes and avoid penalties when you wait until you’re eligible to withdraw. It’s also important to note that there are exceptions to the 59½ rule for 401(k) withdrawals. Some exceptions include: Unreimbursed medical expenses (over 7.5% of AGI) Health insurance premiums while unemployed First time homebuyers (withdrawal up to $10,000) Withdrawing after leaving your job at age 55 or older (50 or older for certain public safety employees) Substantially equal periodic payments (SEPP) Terminal illness Total and permanent disability If you choose to leave your job at age 55, you can only make penalty-free withdrawals from the 401(k) you set up through that job. If you have any other 401(k) plans, you have to wait until you’re 59½ or qualify for an exception to make a withdrawal. The “rule of 55” also doesn’t apply if you have a 401(k) and are self-employed. If you’re no longer working and contributing to a solo 401(k), the plan will end. What qualifies as a “hardship withdrawal”? While the IRS typically discourages people from making early withdrawals from 401(k) accounts, participants may be allowed to take a hardship withdrawal. If you’re using the money to cover certain expenses that are considered an “immediate and heavy financial need” and your distribution is limited to the amount necessary to satisfy such financial need, you can usually take a hardship withdrawal from your 401(k). Hardship distributions are typically allowed for you, your spouse, your dependents or your primary beneficiaries to cover items such as: Medical expenses Funeral expenses Tuition and other education expenses Purchase of a principal residence Payments necessary to prevent eviction or foreclosure Costs to repair damage to your principal residence Using hardship distributions to cover emergency expenses can help when you really need it, but there are some things to consider: Your hardship distribution reduces the total amount in your retirement account, which affects your retirement savings. Any untaxed money you receive as a hardship distribution will be taxed at your regular income tax rate. Unless you’re 59½ or qualify for an exception, you may still face a 10% penalty. Like any financial decision, it’s important to weigh your options before deciding to receive hardship distributions. You may also want to consult a professional who can help you choose the best course of action based on your finances and provide practical retirement tips. What are the other disadvantages of withdrawing from your 401(k) early? The biggest and most immediate disadvantage of withdrawing from your 401(k) is the cost. Not only do you have to pay a 10% penalty, but early withdrawals are also taxed at your current income tax rate — which is higher than it will be when you retire. Let’s say you withdraw $10,000 from your 401(k). You’ll face a 10% penalty of $1,000, plus you’ll be taxed at your current income tax rate. That additional $10,000 is added to your taxable income, which means you could also land in a higher tax bracket. Another huge disadvantage of using a 401(k) withdrawal to pay off debt is that it negatively impacts your retirement savings. Each early withdrawal reduces your total savings, so you’ll have less when you retire. Unless a financial expert recommends using your 401(k) to pay off debt or cover emergency expenses, you’re better off maximizing your retirement savings and planning for the future. What is the difference between a 401(k) withdrawal and a 401(k) loan? Depending on the type of employer-sponsored plan you contribute to, you may be allowed to take out a 401(k) loan instead of making a withdrawal from your 401(k). Loans are an option if you don’t want to pay penalties and additional taxes on early withdrawals. Not all employer-sponsored plans offer 401(k) loans, and maximum loan amounts vary. Per the IRS, you can borrow the lesser of: $10,000 or 50% of your vested account balance or $50,000 Generally speaking, you have up to five years to pay back your 401(k) loan with interest. Each time you make a payment, that money goes back into your retirement account — so you’re not reducing your total savings by taking out a loan. One key thing to remember is that 401(k) loans are attached to your employer. If you leave or lose your job before paying off your loan, you may have a shorter period to repay your loan. If you can’t repay it, there are consequences. The portion of your loan you’re unable to pay will be considered a distribution from your 401(k), which means the early withdrawal penalties and additional taxes will apply. Alternative methods to consider for paying off debts Whether you have credit card debt, student loan debt, or medical debt, there are strategies you can use to start paying off those debts and eventually become debt-free. Before you make an early withdrawal from your 401(k), explore some of these strategies. Debt consolidation is one way to start managing your debt. Many people have various types of debt, which means they have to make several monthly payments to make sure they do not default on any loans. Instead, you can consolidate all your debt into a single loan and a single monthly payment. This makes it easier to pay down your debt each month, and you may be able to negotiate better loan terms with a debt consolidation lender. Budgeting is another way to start lowering your debt. Create a budget with your monthly income and expenses, then find areas where you can cut back. You can use the money you save by cutting back to pay your debts off faster. You can also negotiate interest rates depending on your situation. If you can’t seem to get out ahead of loan or credit card interest, try negotiating a lower rate with your lender. Previous Post The Basics of a Traditional IRA Next Post Maximize Your Tax Deductions for Your Rental Property Written by TurboTaxBlogTeam More from TurboTaxBlogTeam 25 responses to “Using 401(k) to Pay Off Debt: Should You Do It?” I’m not sure exactly why but this website is loading incredibly slow for me. Is anyone else having this problem or is it a problem on my end? I’ll check back later and see if the problem still exists. Reply Yes, please let us know if you experience this issue again and let us know what browser you’re on. Thank you, Lisa Greene-Lewis Reply I guess I look at this differently – everyone complains that the taxes are horrible, but you would have paid them if you didnt contribute, and you will pay them when you withdraw anyway regardless of age. The only time that you could screw yourself here is if the withdraw bumps you into another tax bracket. So really all there is to discuss here is the 10% early withdraw penalty. If that is worth the piece of mind to you to get out of debt I say GO FOR IT. All these returns of 8-12% a year have not been happening for most since 2007 – and inflation is gobbling up any gains below that you are getting. I hesitate to listen to the financial advisors as they have a vested interest in you staying. The real keys here are this: does/did your employer match contributions? and are you a conscientious enough person to save/invest elsewhere? If you are/ were matched dollar for dollar – put that much in at least – even if you want to take it out EVERY year – you will still come out ahead (based on your tax bracket) If you have ANY debt that is drawing interest above 5% or so that you cannot cashflow until gone within a few years – pay it off. The investment and retirement planning that we are being fed by these fast food investment planners is not accurate – they sell you what they are taught to sell you – THINK FOR YOURSELF Reply I recently got married. I took out a loan on my 401k to pay $10,000 for the wedding, reception, etc. I “paid myself back” at 4% interest for a few months while we planned the wedding. Using the wedding gifts and funds collected from the guests, I then immediately paid back the loan. It worked out great! Reply I do agree, Until Debt… If people aren’t on the same page, the battle is over before it starts. It can indeed be tough, but it is well worth it! Thanks for this post. Reply I agree with you 100%. However, Many people lost job during the recession and ended up breaking 401(k),just to keep up with mortgage and bills, and to supply daily bread onto the dinner table to feed their family and children. What would you do if you are in this situation when your last cash is all dried out and no other income source is to be seen? Reply Kikster, no offense, but you’re living under a rock if you think retirement funds aren’t up for grabs during a divorce. That money is NOT yours and yours alone. I know the hard way. That being said, I strongly doubt a judge would decide how debt would be settled (i.e., via retirement funds). He’s only going to decide who gets what assets and who gets what debt. Reply Hi Kevin, If I were you I would pay a little visit to my HR department and get some additional clarification. My experience as an HR professional is that your spouse does have access to your 401K and if you should divorce you will have to give up 1/2, but sometimes it does depend on the laws of your state. So don’t be fooled 🙂 Reply kevin karstetter – I’m pretty sure that a spouse can NOT touch ANY of your retirement in a divorce. That money is considered yours and yours alone! During a bankruptcy you can’t even be forced to use your retirement to pay off the debt. Reply I have taken two loans from my 401k and have paid them both off through my payroll deductions. Reply I had to withdraw from my 401K to pay our taxes. Reply My husband changed jobs in early 2008 and needed to do something with his 401k. I suggested rolling it into a bank cd until he was at his new job long enough to start a 401k. He chose to cash it out to pay for some home repairs. BAD IDEA. The penalty for cashing it out early was very bad. And even worse we were taxed on it next year when we filed. We ended up with almost half it’s value. Before doing anything, ask a tax consultant what you will be up against. Reply It is no one’s business how people use their 401K’s. We used ours to pay off some debt and it helped us alot. The banks were not willing to help and if they were we could not afford the intersest rate on any loan. Our money goes right back where we took it out and we watch it close and would do it again. Americans have to look arter themselves. Reply Laid off-We had to take the 401(k) payoff or lose our house. Three months of emergency fund helped the first three months but not the six months after that. We of course were penalized and had to pay tax on it, but we had no recourse. We could not sell our house for what we paid for it. Now, we have sold our house and have a new job and are steadily contributing to a TSP and IRA’s and have six months of emergency fund. We will never catch up before retirement, but we are doing the best we can. Reply I was forced to move from my prior location due to the crime rate escalating. When the drug addict/dealer moved in next door, it was TIME TO GO… I had limited funds and thought it impossible to buy a house. If it was not for my 401K, I would not have been able to purchase an affordable home. I bought a house in another city and better neighborhood. What price do you put on peace of mind and safety? Reply I needed some important home repairs or my homeowners insurance was going to cancel me. The only choice I had, after trying to get other loans for over a year, was a loan from my 401(k). It’s been almost one year and it will be paid in four more. Thankful that I had that option. Reply I appreciate your post, thanks for sharing the post, i would like to hear more about this in future. Reply As a single woman living in NJ, I used my money from my 401K to pay off debt and get better footing. I’m alot better off but still not 100%. I also took care of people for a number of years who were worse off then me. If anyone wants to judge how I paid off my debt, let them walk and 1/8 of a mile in my shoes. Reply I think we should not be penalized by using the money to pay off the mortgage. Reply I am a single mother of two, living on one salary and struggling to meet month end. I own a house and I have 7 more years to pay it. If I loose my job, I think I will take my 401K to pay my mortgage. I will not loose my house after so much sacrifice. Reply We have medical expenses that were draining our income and costing us $500.00 a month more than our monthly income. We survived for awhile by selling possessions on ebay and a few odd jobs. Eventually we were in debt $25,000.00 with no relief in sight. We paid our debt off by borrowing against our house (which had been paid off in 1988). However, the medical expenses kept coming because I am without insurance due to pre-existing conditions…even though there are now supposed to be insurance options for someone like me, I haven’t found any yet. Finally, I am doing better and we can handle the monthly expenses, but we couldn’t pay our debt. We cashed in some of our retirement to get on our feet…and we are glad we did. Eventually, I should be well enough to return to work and rebuild part of our retirement…but not all that we lost. (We do not have to pay taxes on the money we took out as there are exceptions for medical expenses.) Of course, we don’t know what the future holds, but so far we are very happy to have our heads above water and to be able to live within our means again. Having our home free and clear again is great too. Reply Divorce..Can my spouse get the courts to “make me” draw money from my 401K to settle our economic issues. I have approx 100K in the account and she wants half…we were only married 4 years. I no longer work for the company (TEXTRON) but want to let it ride till I reach retirement in about 10yrs. Reply You hit all the high points here. Well addressed. I’d avoid touching the 401(k) if I could. It’s unfortunate that the high card rates create a spiral many people can’t get out of. At 4%, a 5 year loan of $10,000 would require a $184 monthly payment. At a 20% rate on a charge card, that same payment would take nearly 12 years to pay off the same $10,000. Worse case, if one loses their job, pull the cash back off a card. That avenue isn’t cheap, but a savings of 16% per year would negate the fee to do so. Reply Pay off the debt first. Interest rates on savings are pcihettaally low. In the long run, you will save more money by paying off the debt and not spending it on interest fees. One way to get your debt under control is to focus on one card and pay it off. Then once it is paid off, take that money and increase another card’s payment by that amount until it is paid off. By paying off your debt, it will increase your credit rating and in the future you will get better interests rates on other loans, such as car and house. That can save you hundreds a month.References : Reply Hi Cecilia, I love your feedback. I was going to blog about this. I have done this and also recommended this for clients. This strategy definitely works. Thank you again for your feedback! Lisa Greene-Lewis https://blog-turbotax-intuit-com-develop.go-vip.co Leave a ReplyCancel reply Browse Related Articles Tax Forms IRS Form 1040: A Quick Guide to Filing Your Tax Return Tax Forms What is a W-2 Form? 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I’m not sure exactly why but this website is loading incredibly slow for me. Is anyone else having this problem or is it a problem on my end? I’ll check back later and see if the problem still exists. Reply
Yes, please let us know if you experience this issue again and let us know what browser you’re on. Thank you, Lisa Greene-Lewis Reply
I guess I look at this differently – everyone complains that the taxes are horrible, but you would have paid them if you didnt contribute, and you will pay them when you withdraw anyway regardless of age. The only time that you could screw yourself here is if the withdraw bumps you into another tax bracket. So really all there is to discuss here is the 10% early withdraw penalty. If that is worth the piece of mind to you to get out of debt I say GO FOR IT. All these returns of 8-12% a year have not been happening for most since 2007 – and inflation is gobbling up any gains below that you are getting. I hesitate to listen to the financial advisors as they have a vested interest in you staying. The real keys here are this: does/did your employer match contributions? and are you a conscientious enough person to save/invest elsewhere? If you are/ were matched dollar for dollar – put that much in at least – even if you want to take it out EVERY year – you will still come out ahead (based on your tax bracket) If you have ANY debt that is drawing interest above 5% or so that you cannot cashflow until gone within a few years – pay it off. The investment and retirement planning that we are being fed by these fast food investment planners is not accurate – they sell you what they are taught to sell you – THINK FOR YOURSELF Reply
I recently got married. I took out a loan on my 401k to pay $10,000 for the wedding, reception, etc. I “paid myself back” at 4% interest for a few months while we planned the wedding. Using the wedding gifts and funds collected from the guests, I then immediately paid back the loan. It worked out great! Reply
I do agree, Until Debt… If people aren’t on the same page, the battle is over before it starts. It can indeed be tough, but it is well worth it! Thanks for this post. Reply
I agree with you 100%. However, Many people lost job during the recession and ended up breaking 401(k),just to keep up with mortgage and bills, and to supply daily bread onto the dinner table to feed their family and children. What would you do if you are in this situation when your last cash is all dried out and no other income source is to be seen? Reply
Kikster, no offense, but you’re living under a rock if you think retirement funds aren’t up for grabs during a divorce. That money is NOT yours and yours alone. I know the hard way. That being said, I strongly doubt a judge would decide how debt would be settled (i.e., via retirement funds). He’s only going to decide who gets what assets and who gets what debt. Reply
Hi Kevin, If I were you I would pay a little visit to my HR department and get some additional clarification. My experience as an HR professional is that your spouse does have access to your 401K and if you should divorce you will have to give up 1/2, but sometimes it does depend on the laws of your state. So don’t be fooled 🙂 Reply
kevin karstetter – I’m pretty sure that a spouse can NOT touch ANY of your retirement in a divorce. That money is considered yours and yours alone! During a bankruptcy you can’t even be forced to use your retirement to pay off the debt. Reply
My husband changed jobs in early 2008 and needed to do something with his 401k. I suggested rolling it into a bank cd until he was at his new job long enough to start a 401k. He chose to cash it out to pay for some home repairs. BAD IDEA. The penalty for cashing it out early was very bad. And even worse we were taxed on it next year when we filed. We ended up with almost half it’s value. Before doing anything, ask a tax consultant what you will be up against. Reply
It is no one’s business how people use their 401K’s. We used ours to pay off some debt and it helped us alot. The banks were not willing to help and if they were we could not afford the intersest rate on any loan. Our money goes right back where we took it out and we watch it close and would do it again. Americans have to look arter themselves. Reply
Laid off-We had to take the 401(k) payoff or lose our house. Three months of emergency fund helped the first three months but not the six months after that. We of course were penalized and had to pay tax on it, but we had no recourse. We could not sell our house for what we paid for it. Now, we have sold our house and have a new job and are steadily contributing to a TSP and IRA’s and have six months of emergency fund. We will never catch up before retirement, but we are doing the best we can. Reply
I was forced to move from my prior location due to the crime rate escalating. When the drug addict/dealer moved in next door, it was TIME TO GO… I had limited funds and thought it impossible to buy a house. If it was not for my 401K, I would not have been able to purchase an affordable home. I bought a house in another city and better neighborhood. What price do you put on peace of mind and safety? Reply
I needed some important home repairs or my homeowners insurance was going to cancel me. The only choice I had, after trying to get other loans for over a year, was a loan from my 401(k). It’s been almost one year and it will be paid in four more. Thankful that I had that option. Reply
I appreciate your post, thanks for sharing the post, i would like to hear more about this in future. Reply
As a single woman living in NJ, I used my money from my 401K to pay off debt and get better footing. I’m alot better off but still not 100%. I also took care of people for a number of years who were worse off then me. If anyone wants to judge how I paid off my debt, let them walk and 1/8 of a mile in my shoes. Reply
I am a single mother of two, living on one salary and struggling to meet month end. I own a house and I have 7 more years to pay it. If I loose my job, I think I will take my 401K to pay my mortgage. I will not loose my house after so much sacrifice. Reply
We have medical expenses that were draining our income and costing us $500.00 a month more than our monthly income. We survived for awhile by selling possessions on ebay and a few odd jobs. Eventually we were in debt $25,000.00 with no relief in sight. We paid our debt off by borrowing against our house (which had been paid off in 1988). However, the medical expenses kept coming because I am without insurance due to pre-existing conditions…even though there are now supposed to be insurance options for someone like me, I haven’t found any yet. Finally, I am doing better and we can handle the monthly expenses, but we couldn’t pay our debt. We cashed in some of our retirement to get on our feet…and we are glad we did. Eventually, I should be well enough to return to work and rebuild part of our retirement…but not all that we lost. (We do not have to pay taxes on the money we took out as there are exceptions for medical expenses.) Of course, we don’t know what the future holds, but so far we are very happy to have our heads above water and to be able to live within our means again. Having our home free and clear again is great too. Reply
Divorce..Can my spouse get the courts to “make me” draw money from my 401K to settle our economic issues. I have approx 100K in the account and she wants half…we were only married 4 years. I no longer work for the company (TEXTRON) but want to let it ride till I reach retirement in about 10yrs. Reply
You hit all the high points here. Well addressed. I’d avoid touching the 401(k) if I could. It’s unfortunate that the high card rates create a spiral many people can’t get out of. At 4%, a 5 year loan of $10,000 would require a $184 monthly payment. At a 20% rate on a charge card, that same payment would take nearly 12 years to pay off the same $10,000. Worse case, if one loses their job, pull the cash back off a card. That avenue isn’t cheap, but a savings of 16% per year would negate the fee to do so. Reply
Pay off the debt first. Interest rates on savings are pcihettaally low. In the long run, you will save more money by paying off the debt and not spending it on interest fees. One way to get your debt under control is to focus on one card and pay it off. Then once it is paid off, take that money and increase another card’s payment by that amount until it is paid off. By paying off your debt, it will increase your credit rating and in the future you will get better interests rates on other loans, such as car and house. That can save you hundreds a month.References : Reply
Hi Cecilia, I love your feedback. I was going to blog about this. I have done this and also recommended this for clients. This strategy definitely works. Thank you again for your feedback! Lisa Greene-Lewis https://blog-turbotax-intuit-com-develop.go-vip.co