In the first quarter of 2026, Americans collectively had $18.8 trillion in household debt (1). Some of this is credit card debt, which comes at a very high cost. In fact, the Federal Reserve Bank of St. Louis (2) reported that the average credit card interest rate was 21% as of April 7, 2026.

Carrying credit card debt can be really stressful because it is so costly and because minimum payments on cards are essentially designed to keep you trapped in debt forever. Unfortunately, if you're struggling to pay your credit card bills, you may be desperate for any solution, including raiding your retirement account.

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Let's pretend, for example, that Mason is 32, lost his job, and owes $25,000 in credit card debt. He doesn't know what to do to get out of the hole, and he's considering taking money out of his 401(k) to pay off the balance.

So, should Mason tap into his retirement plan, or are there better alternatives out there?

Since Mason is dealing with credit card debt at a high interest rate and has no clear payoff plan, it's understandable that he'd be tempted to take money out of his 401(k). But that doesn't mean it's a good idea, as the cost of raiding his retirement account could be very substantial.

"When someone asks me about tapping their 401(k) to pay off $50,000 in credit cards, I simply ask them if they're prepared to pay the tax consequences of early withdrawal," Christopher Walsh (3), a senior advisor with Capital Choice Arizona, told MoneyWise.

Walsh explained that since Mason is under 59 ½, he'd likely owe a 10% penalty (4) on top of owing tax on the withdrawal at his ordinary tax rate. If he's in the 22% federal tax bracket, he could effectively end up paying as much as 32% in taxes to save 21% on interest.

Beyond the tax bill, raiding a 401(k) can also cause major losses for another reason.

"The cost is bigger than the sticker price of what's withdrawn," Michael McAuliffe (5), President and Founder of Family Credit Management (6), told MoneyWise. "It's also the growth that you have now given up. $50,000 left invested in your account for 20 years at a 7% return could grow to roughly $195,000. So when you consider taking money out, that's what you're giving up."

Both McAuliffe and Walsh also warned that you're more likely to tap into your retirement account again once you've done it once, and that if you use your 401(k) to pay off credit card debt without getting your spending under control first, there's a really big risk that you could end up even deeper in the hole.

"Behavior ends up being the real issue. Somebody takes a loan against their 401(k), pays off the cards, and now the credit is available again. If you're not willing to change the behavior, you're just going to compound the problem," Walsh said.

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Since there are such big downsides, Mason shouldn't rush into raiding his 401(k) before exploring all of his other options.

Specifically, McAuliffe recommends a debt-management plan (7), which is usually arranged through a credit counseling agency. This is a structured payment plan where Mason could make one monthly payment, and where creditors often agree to lower interest rates or waive some fees.

A debt-settlement plan is another alternative and involves negotiating with creditors to pay back less than the full amount due. While this could damage Mason's credit temporarily, it can also make getting out of debt easier and cheaper, and it doesn't jeopardize Mason's 401(k), which is protected from creditor claims (8) (even in bankruptcy).

Since Mason is unemployed and can prove financial hardship, his creditors may be willing to work with him to explore these options.

If Mason truly feels like he has no other choice and he has to access his 401(k), he should also be smart about how he does it.

"A loan from your 401(k) is generally the safer option if your plan allows it," said McAuliffe. "You avoid the immediate taxes and penalties, and you're paying yourself back instead of a creditor."

However, he warned there are still risks.

"If you leave your job, voluntarily or not, that loan typically becomes due really quickly and will convert to a taxable withdrawal with penalties attached if not paid back," he said.

The interest you pay yourself back on your loan is also double-taxed (9) because you pay back your 401(k) loan with after-tax dollars and still pay tax on 401(k) withdrawals as a future retiree.

Ultimately, Mason's best bet would be to make sure he starts living on a budget, to look aggressively for a job so he can get some income coming in, and to contact his creditors, explain he's facing hardship, and see what kind of deal they're willing to work out.

Until he's done all that and explored all possible solutions, he should leave his 401(k) alone.

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Federal Reserve Bank of New York (1); Federal Reserve Bank of St. Louis (2); Capital Choice Arizona (3); Internal Revenue Service (4); LinkedIn (5); Family Credit (6); National Foundation for Credit Counseling (7); Equifax (8); Western & Southern Financial Group (9)

This article originally appeared on Moneywise.com under the title: A bigger tax hit to save in interest — why raiding your 401(k) to pay off credit cards can backfire badly

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.