Cashing in your 401k to pay off debt sounds like a great plan, but is it really a good idea or not? Though it may seem like a quick fix and a way to solve your current situation, there is a good possibility it won't actually be enough, you will lose a lot of money, and it will cause more problems for you in the future. There are other ways to go about this without touching your retirement savings accounts.

When you withdraw from one of these retirement accounts before reaching retirement age (59 years and 6 months) then you have to pay both state and federal taxes, and a ten percent early withdrawal penalty, on the money you withdraw. While this may seem like a small issue, in reality (depending on what tax bracket you fall into) this can easily add up to thirty to forty percent--meaning you may not even have the funds you need to pay off that debt anyhow.

While you may think you're paying impossible interest rates right now, you'll lose a lot more money withdrawing funds right now. Not only do you lose the money explained above, but you also miss out on the money your investments would have made between now and the time you reach retirement.

Even if you do have the funds to cover your current situation, when you finally reach retirement you'll be set back the amount you're losing now. Really saving enough for retirement so that you can live the way you'd like to is something few people actually do. You don't want to have to work longer, and you don't want to have to sacrifice your dreams, so avoid losing this money.

With this in mind the interest rates you're currently paying hopefully sound like a less awful situation. Depending on your situation you may want to look into debt consolidation, or possibly even bankruptcy. Consulting a financial counselor is a great way to get some advice on your particular situation.

Cashing in your 401k to pay off debt is definitely not a good idea, but there are other options out there for you.