Mishaps of the 401k.

There are a lot of things that people don't know about a 401k. Sometimes people ask me a question like the following:

"I have $20,000 in debt. Why don't I just pay it off with my 401k?"

The answer is quite simple. The 401k was designed as a retirement plan, therefore, it was designed to only be used when people retire. The official age stated by the government is the age 59 1/2. If you are not at least 59 1/2 when you take out your 401k, you will take a huge financial hit in taxes. You will pay approximately 45% taxes if you were to take it out before the age of 45. From 45-59 1/2, you will pay approximately 10% in taxes. Let's look at it another way. Say I'm $20,000 in debt and I have $35,000 in my 401 which I wish to cash out. If my age was below 45, then I wouldn't even have enough cash to pay off my $20,000 dollar debt because of the taxes that will occur from me cashing it out early.

A great site to read about 401k's and how they work can be located at the 401khelpcenter.