I plan to retire next March; the only way that is by paying off charge cards and auto loans using my 401(k), leaving me with $100,000. I will have a house payment of $1,960 and will get a $2,800 pension and $1,800 from Social Security. Should I? – Paul
It sounds to us like you may be in pretty good shape if the remaining lifestyle expenses don’t exceed $2,600 per month. We’re just not sure if taking a distribution from your 401(k) to pay off your debts in one fell swoop is making the most of your resources. As you know, distributions from your 401(k) will be taxable as ordinary income. Thus, every dollar you pull from your 401(k) plan will be added to your income and taxed. A big distribution would result in big taxes. This is even more likely if you make the distribution while you still have significant employment income. It might be more prudent to supplement your pension and Social Security with periodic distributions from your 401(k), or you can roll over to an IRA if your plan does not allow periodic withdrawals, as long as you are age 59 and a half or older. This could minimize the tax impact of your distributions but still give you a bit more income to meet your obligations. In this way, you’d still use your 401(k) to pay off the auto and credit card debt, but you would just do it in a tax savvy manner.
Please ensure you have a solid budget in place to avoid carrying a balance on credit cards in the future – it’s only under these circumstances that we’d recommend this strategy. It might be an ideal time for you to enlist the help of someone like us. Consider hiring a fee-only financial planner to help you map out a sound strategy. If you’re interested, our planners at USAA are available for hourly consultations. Call (877) 699-2654.