Expert: Allen - 7/29/2007

Question
After a divorce about 10 years ago, I was stuck with a huge credit card debt,
followed by a huge tax debt and some very high medical bills (bad timing)
and now am still faced with $50,000  in credit card debt. I have accumulated
a good 401K and am changing employers, and want to eliminate all debts. Of
course there will be living expenses, but I want all the credit cards closed
(except for a few low interest if needed in emergency and to keep good
credit).
I am at the point that I need to cash out of the 401K and pay everything off
and be "debt free" once and for all, even though it will surely cost me in
taxes. This seems to be the only light at the end of the tunnel.
I don't think I could roll over the 401K to an IRA (or anything) and take that
amount out to pay all debts - so is his my only option?
I also want to buy a house in the next few years, and at this point, will not
ever see that happening with that outstanding debt.
Any advice would be greatly appreciated.

Answer
Obviously getting rid of the credit card debt is very important. The only thing to be aware of is that the distribution from the 401k will be taxed heavily. You will have to pay federal income tax (The 20% that is withheld is only an estimate. The exact tax will depend on your tax bracket), state income tax (if you live in a state that has an income tax) and a federal 10% excise tax on most distributions before you are 59 1/2 years old. You should therefore only take from the 401k what is needed to cut your credit card debt. If anything is left, you should roll it to an IRA.
Good luck.