Would you liquidate your 401k to pay off debt in this situation?

I have a potentially complex situation that I am looking to resolve in the least painful way possible.

I am going through a divorce. My income is nearly twice as much as my ex’s, and I am going to have to assume over 16k in
debt out of the agreement. It is all credit card debt. I also have a car payment and student loan debt, along with a home mortgage
with a maxed line of equity. Even with the outstanding mortgage, plus the maxed equity, I have still approximately 30% in gross equity.
Naturally, in the agreement, she will be getting half of this equity as a result of me refinancing to get her off the deed. Along with
this, I have a small 4 figure IRS debt that we will owe. I will probably be forced to pay 60% of it.

My question concerns the best way to handle the credit card debt. I have a good distribution of debt to balance right now
and my FICO score is close to 800 and I want to protect this fiercely. I KNOW am going to have additional expenses coming
in the form of lawyers fees, court costs, etc, and I am debating liquidating 401k cash in order to avoid adding more debt on my cards.

My highest card rate is around 11%. My other card is slightly higher but has a lower balance. Both cards hold a variable APR.

I’ve been offered, and accepted but not yet used, a 0% promo rate for a year that I can move the bulk
of my 11% balance to (there will be some left though). It will go to 13% after the promotion period.

I mention all this because the portion of 401k I want to liquidate is going to be more than what I need; my 401k
administrator suggested that I withdraw as much as I can from my 401k without crossing into the next tax bracket for 2015.
They will hold the initial penalty taxes in escrow and pay it immediately to the IRS.

So I’m considering using the remainder to pay off these cards to a zero balance, which leaves me with having to pay the remaining
401k taxes that will come due in 2015. And my initial plan is to save the money I would have used to pay the card payments and
instead store it in a safe interest bearing instrument until the taxes come due. I’ll be able to save much of the tax bill, and
as I see it, in a year I’ll be almost if not completely debt free, penalty paid to government, then I can concentrate on making
contributions back to my 401k plan (my employer does not contribute, which is why a loan against it isnt an option either).

Normally I know I would never recommend to anyone to liquidate their retirement savings, but I am in a position where I
literally have credit as my other choice for lawyers and if these get maxed out prior to my refinance, it will hurt my rate.
And since I actually need the cash, I dont see consolidation being an option; I’m trying not to spend any credit at all.

If you were me, what would you do? If I missed anything important, I’ll be happy to add in comments.


One Response to “Would you liquidate your 401k to pay off debt in this situation?”

  1. Withdrawing from your 401(k) is a terrible idea.

    The idea is to reduce your interest expense by leveraging free loans (0% APR purchases). This will help you pay down your debt more.

    If you have 0% APR on purchases, you can make purchases on things you already buy. Then use that money towards other debt, while making monthly payments on the 0% APR card. This way, you pay off the credit card before the 0% APR changes. You can then rinse and repeat on another 0% APR card offer. If your credit score is 800, you can do this multiple times. Citi Simplicity gives you 18 months 0% APR. Chase Slate and Chase Freedom gives you 15 months 0% APR. Others typically give you 12 months or less.