Are you investing or defending?
Investing is purchasing to increase either the monthly return on the money or to improve the principle or both. By extension, investing can be buying a business or a house and renting, etc. The idea is to improve the monthly cash flow by increasing the amount of money coming in.
Defending is protecting the principle from loss due to taxes, inflation or devaluation (currency devaluation). By extension, defending can be paying off debts or refinancing the house, etc. The idea is to improve the monthly cash flow by decreasing the amount of money flowing out.
Taking money out of a 401K to pay off debt is kind of an expensive proposition in the long run. First you will be hit with a 30% tax on the money coming out. This only makes sense if you have very high interest debt say 25% or higher credit card debt. But if you are concerned that the government is going to effectively take that investment, paying off debt does make sense.
I have seen other combine 401k withdrawal / loans to create a new monthly cash flow picture. This person had a larger home that they no longer needed but were upside down. They tapped their 401K to get right side up, then sold their home, and then borrowed on a smaller home that met their needs. Net savings was over $700 per month. This savings was then used to pay off other debts.
I am of the defensive mindset at this time. Pay of debt as fast a possible, reduce monthly expenses, etc.
Hi Taxcontrol, where are you getting the 30% figure? I thought it was 10% penalty on early withdrawal from 401k with no hardship excuse.
Unless things change at the last minute, Americans who make up to $48,600 will have a 15 percent rate. Between $48,600 and $125,450 a year will have a 28 percent rate, and those who make more than $398,350 will pay a rate of 39.6 percent.