Ask an Advisor: I Have $80,000 in My 401(k), but I’m Buried in Credit Card Debt. Should I Stop Saving for Retirement?

I’m in my late 30s and have accumulated significant credit card debt, including several high-interest cards that are nearly maxed out. I have no emergency savings, contribute to my 401(k) (about $80,000) and have roughly $11,000 invested in a taxable brokerage account. I’m worried that my debt is preventing me from making meaningful progress toward retirement, and I feel stuck trying to decide what to do first. Should I pause my retirement contributions to focus on paying off my credit card debt, or is there a way to tackle both goals at the same time?

One of the toughest financial decisions that people in their 30s and 40s face is how much to save toward retirement when they carry debt. You’ve done a great job of beginning to build a nest egg for retirement, but credit card debt can be a huge financial weight on any savings plan.

In general, many people benefit from reducing retirement contributions, or pausing them entirely, to eliminate high-interest debt, which is debt with an interest rate 8% or higher. Credit cards typically fit that bill, as the latest data from the Federal Reserve Bank of St. Louis lists the average interest rate on credit card plans at 21%. ¹

Without knowledge of your complete financial picture, I cannot provide you with specific recommendations to implement. However, I would reiterate that eliminating high-interest debt often trumps saving for retirement. With that said, I want to provide you with a few different strategies for paying off credit card debt and other financial considerations to think about prior to implementing your plan.

If you’re trying to decide whether to prioritize paying off debt or saving for retirement, a financial advisor can help you weigh the tradeoffs and create a strategy. Connect with an advisor for free.

Two Approaches

There are two prominent debt payoff strategies that financial planners, including myself, often use to help people manage their debt. Evaluate the pros and cons of each and consider the method that works best for you.

1. The Debt Avalanche Method

The Debt Avalanche Method focuses on minimizing the amount of total interest you pay over the life of all your debt. 

You’ll start by ordering your credit card debt from lowest interest rate to highest interest rate. From there, you’ll pay the minimum on all the credit cards except the card with the highest interest rate. For the card with the highest interest rate, you’ll make as large a monthly payment as you can afford. Once that card is paid off, you add the monthly payment to the minimum payment of the card with the second-highest interest rate. 

The process continues until all credit card debt is eliminated.

2. The Debt Snowball Method

Unlike the Avalanche Method, the Snowball Method focuses less on math and more on psychological wins. You start by listing your credit card debts from the smallest balance to the largest. Then, you make the minimum payment on every card except the one with the smallest balance. For that card, you pay as much as you can afford each month.

Once the smallest balance is paid off, you take the amount you were paying toward that card and apply it to the card with the next-smallest balance, in addition to its minimum payment. You continue this process until all of your credit card debt is eliminated.

(And if you need help creating a plan to tackle your debt, speak with a financial advisor who offers financial planning.)

There are advantages and drawbacks to each method. You may prefer the Avalanche Method because you’ll pay less in interest, but you may not pay off that card for quite some time. On the flip side, the Snowball Method gives you a psychological “win” because you attack the card with the smallest balance first. However, you likely will end up paying more in interest on all your credit cards compared to the Avalanche Method.

Other Considerations

You mentioned that you have a 401(k) plan, which may be tempting to use to help eliminate your credit card debt. However, the IRS has strict guidelines on an individual’s ability to access funds from their 401(k) plan. Some people may be able to access their 401(k) via a hardship withdrawal, but paying off credit card debt is unlikely to qualify. 

Another option is to take a loan from your 401(k), provided your plan allows for it. The loan is not taxable, provided it meets a series of requirements. The maximum loan is limited to 50% of your vested balance or $50,000, whichever is less. I would highly encourage you to speak with the plan administrator prior to moving forward with any loan.

You also mentioned that you have some money invested in stocks and bonds outside your 401(k). I’m assuming that these investments are held within a taxable brokerage account.  Brokerage accounts are considered non-retirement accounts, which allow investors to access money without any of the age restrictions of a 401(k) or IRA. 

Using a brokerage account is often more advantageous than taking a loan or early withdrawal from a 401(k). Most withdrawals from brokerage accounts are partially taxable. The non-taxable portion is a return of your initial investment (called cost basis), while the taxable portion represents any investment earnings. If you decide to use your brokerage account, then you should consult a tax professional to help you determine the potential tax impact.

(And if you need help deciding how and went to sell assets to pay off debt, speak with a financial advisor.)

Lastly, I wanted to mention a few strategies that I’ve found have helped others avoid credit card debt. The first is to consider using a budgeting or cash flow app like Monarch Money. These apps can be great options because they give you insight into your income and expenses. That information can be used to set a budget and ensure you’re spending less than you’re earning. 

Also, building an emergency fund can help you avoid carrying a credit card balance, because a surprising expense can be covered with money in a bank account. Without an emergency fund, many people struggle to pay off their credit card balance in full each month.

Bottom Line

The decision to stop contributing toward retirement to tackle debt is often advantageous for individuals who carry credit card debt, given the typically high interest rates. You can tackle credit card debt through various repayment strategies and, in some cases, by using taxable brokerage assets.

Financial Planning Tips

• Balance taxable, tax-deferred and Roth withdrawals to manage lifetime tax liability, Medicare IRMAA thresholds and estate goals. A thoughtful withdrawal strategy can help you avoid unnecessarily accelerating income in high-tax years while preserving tax-free assets for later retirement or heirs.
• If you have money to invest, a financial plan can help you decide how to allocate it, manage risk and keep your strategy aligned with your long-term goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Matt Hofacre, CFP®, EA, MSPFP, is a SmartAsset financial planning columnist who answers reader questions on personal finance topics. Matthew is a financial advisor and owner of Pay It Forward Financial Planning. He has been compensated for this article. Additional resources from the author can be found at https://www.payitforwardfp.com/. Please note that Matthew is not a participant in SmartAsset AMP and is not an employee of SmartAsset.

Photo credit: Photo courtesy of Matt Hofacre, ©iStock.com/Ashi Sae Yang