Dave Says: Don't Cash Out Retirement

Dear Dave,

I owe $18,000 on my only car, and the payments are killing me. I’m also upside down on the vehicle by about $4,000. I’m 31, and I’ve got exactly $18,000 in my 401(k). Should I cash it in to pay off the car?

Monty

Dear Monty,

If you use your 401(k) they’ll charge you a 10 percent penalty, plus your tax rate. That means you’ll probably lose anywhere from 25 to 50 percent to the government. I don’t know about you, but I think they already get too much of our money.

I love the fact that you want to get rid of your car payment, but I don’t want you to cash out your retirement plan to make it happen. If you can pay off the car in 18 months or less, I’d advise living on a strict, written budget, and throwing as money as possible toward the car debt until it’s out of your life forever.

If it would take longer than 18 months to pay it off, I’d get rid of the car. To do this, you’d have to sell it for as much as you can get, then go to a local credit union for a small loan to cover the difference. If it’s your only car, you’d need to ask for an extra $2,000 to $3,000 to buy a little beater to drive until you can save up and get into something better.

I hate all kinds of debt, Monty. But being $5,000 to $6,000 in the hole is a lot better than having $18,000 in debt hanging over your head! 

—Dave