”. Early withdrawal from your 401k could cost you in. As a reader of your vaulable website and tax professional I will only comment on your comments on the scarficing for only the 10% penalty. Cashing out the 401k is never a good long term strategy from a logical stand point. 1. My apologies. This was well worth the $55 for the consultation. To be radically clear – we would not have proceeded with the cashout if we’d gotten a red flag from our accountant, who I’ve worked with for more than a decade and who I trust implicitly. I have a friend who saw her 401(k) take a *huge* hit in the 2008 downturn. We just took a dispersement from my husbands 401k (he had transferred it in from another company so he was eligible for an in-service distribution). Generally speaking when people retire they make less income. That’s not for everyone – and it ONLY works because we operate on a very specifically laid out budget that assigns each dollar to a category. Pros: Pay off debt sooner: In some cases, you may pay off debt earlier than expected. Sarah, talk to a local professional about any decisions. I’d be interested in seeing what stocks or funds you are claiming to have lost more money over the past three years than you did during 2008……I’m sure others would be as well. The credit card debt was gone in a few months. My husband and I are seriously considering cashing out one of our retirement accounts to “retire” our credit card debt–still a “retirement” plan, eh? Here you go: http://www.kbb.com/ You probably know about this but thought I’d mention. You shouldnt give advice because goals are based off hopes and dreams as opposed to reality. All you have to do is take out the same amount yearly for 5 years or until you are 591/2. So, we could have kept doing that without the 401(k) cashout and fully paid everything we needed for the taxes. We do have some helps like we can do tax deduction for up to 1600$ a year or somthing ( not exactlly checcked the curreny exchange ) But it would end up in an account i dont have control over. Colleen, I would definitely agree with that as a mathematical factor – and while that’s not the primary factor for me, I’m not disagreeing with its importance as something to weigh! I like your stipulation that you shouldn’t cash out a 401(k) for frivolous reasons (like a vacation), and I do understand the importance of your tae kwon do from previous posts (plus your explanation in your comment–it’s a non-negotiable expense that you’re paying for anyway). Emergency fund is up to 6k. You use the money from the 401K to pay for things already part of an in the black budget, and then at best use the balance to pay off some high interest debt (or at worst buy a car). And, interestingly …, Emptying Out a 401(k) To Pay Off Credit-Card Debt: … in this earlier post (from 2007), Trent gave generally the advice I’m sharing here: That sometimes motivation matters more than mathematics, and that in certain cases, cashouts can be a long-term help as well as a short-term one. Perhaps someone else could explain this a bit. Or is the better thing to do sell my current place and use equity for my downpayment and transition the previous 401K money over to my new 401k and keep on moving. Especially at the Autumn of your life. Should I cash out part of my 401k to pay off my 136,000 in credit card debt? It will set you back significantly in saving for your retirement. Good luck! My freelance work also dried up, and our combined income went down by 35%. 92 Quotes About Debt That'll Make You Think, Laugh, & Tweet! I know I will lose some future interest, but I also have other retirement (military pension) etc that will help me. In our case, we’ve been doing the step-by-step for three years and have, EVEN with this move, another 2+ years ahead of us, which we’d still be doing (albeit for longer) without this cashout. The same was true for my tae kwon do payment. again,t hat is a personal choice – in the end when you look at the “math” and weigh the risk (handling the unexpected) and your peace of mind that is when you decide what you are comfortable with. Clearly I was mistaken. Do What You Love, Graphics by ivylime Designs | Layout & optimization by Think Traffic |. With all due respect, I find your claim that you lost more money in your 401k between 2009 and 2012 than during 2008 hard to believe. I am going to cash out this 401k account to pay down some medical debt that will allow me to purchase a new home. The cost of the early cash-out is high, but not as high as a bankruptcy or foreclosure. What i am particularly impressed with is your foresight to keep the money aside until you have better facts and can make a sound decision in the future. We’ve only got one – and the viability of that as a solution VERY MUCH depends on what career choices we end up with. I so much appreciate all your support and kind words. So the criticism she seems to getting seems a little unfair. How is it now one knows about 72T? In my case, I believe I’ll have far more potential growth in the type of investment vehicles I’m considering in another five-ish years (when debt-free), that will far surpass the modest growth in the intervening five years in this plan, but you are right and that is exactly the type of concern I point out when I talk about age and time and plan mattering – if I did not have a plan to aggressively build a MUCH deeper savings for the future in a fairly short term, that would be a huge concern! That’s why our accountant suggested the off-the-top withholding she did. Even if I can’t wait until retirement, maybe I’ll have a low-income tax year — perhaps due to job loss or taking time off for a baby — between now and retirement during which I can roll it into a Roth… or I’ll get to use it for some other penalty-free way like a house or education. As of 2013, you can contribute up to $17,500 to your 401(k) accounts, or $23,000 if you are at least 50 years old. Much like the 401(k) decision, that makes it sound like a mathematical equation, which it decidedly isn’t. It seems that you are treating your tae know do masters program as a “need”, when it fact it should fall into the same cateogory as a vacation or other “wants”. In the case of readers who are closer to traditional retirement age, our advice takes time and risk into account as well. Period. accountant) about. Determining Withdrawal Eligibility Some quick arithmetic reveals that this is effectively an interest rate of about 13.5%. Dominic, that’s a fair point. Also consider that the withdrawal may end up bumping you into a higher tax bracket costing you a lot more in income taxes. Thanks, OC. I can tell you by the time you replace 34k in savings, the 34k you just forfeited would be A LOT more. Daniel – Thanks for the response. Pay off your debt. The Dave Ramsey Show 325,369 views 6:12 Which Debt Do I Need To Pay Off First? In some cases, especially with high interest rate credit card debts, it’s hard to imagine how the money you might earn on investments would be much more than what you’ll certainl… OR Paying off debt may feel like a never-ending process. It will be immediately owed for sure and when it’s due come tax time, I’m sure the IRS will auto-withdraw it unless an arrangement can be made (payment plan). Thank you. Especially during any period of transition! We definitely put a lot of thought into things – and in particular I have to applaud your decision about your car. What I see in my practice is that most people are surprised by this. Reaspons for this is sure you will have to pay taxes eventually but untill then you have the full benefits of taxfree money reproducing in some funds / interest accounts earning you more then normally you would normally. Should You Still Pay a Credit Card Charge off? You are always a blessing. I definitely am happy – and have increased my family’s happiness exponentially with this decision. It was not an easy decision, but now that it’s done I only wish I had done it sooner! I am considering using one of the 401(k)s to pay off debt. 8 Comments. If you would have come to me…I would have told you, you are just focusing on the 10% penalty as the downside. The 10% penalty being the only difference is not necessarily true. I think from reading your newsletter today, all of these questions are being considered. Almost $12,000. A lot – but not enough to knock out our highest and most high-interest debts. We could use it to attack the smaller debts, but they have favorable APRs – and our hatred of BoA is SO GREAT that we can’t imagine putting the money toward anything but that. Interest vs. Penalties. You’ve waited this long to start:a business, what’s another 18 months? I recently took a good chunk of money out of my 401(k) from a former job and put it toward my credit card debt. I have a one-year plan, a five-year plan and a ten-year plan to first tackle our consumer debt, then to fund any needed higher education expenses for my daughter, Sarah, who is 13, then to live mortgage-free (either in a paid-off home or via renting, depending on circumstances), then to begin fully funding a large-scale “retirement” account. I have a lot of issues with the logic you laid out but the one I’ll focus on is the fact that you appear to need the distribution to cover your 3rd and 4th qtr estimated taxes. This is an option only when you’ve left a position, and there’s often a delay between when you quit and when the money is available to you, if you do choose this route. This post does seem to be raising the heckles from a lot of people, ultimately it was Joan’s 401k to cash in, if she wants to spend it on her hobby and put the rest into savings it’s up to her. Don’t do it! And I can’t wait to keep sharing our journeys! I’m in nearly the exact situation as you and your husband were in. The college account has caught up to where it would have been had we not taken money out, and the Roth-IRA was re-filled the following year. I, too, bought a house during the bubble! I have 60K in my TSP(401K), she has 150k in an traditional IRA (401K rollover). Never cash out a 401(k) to pay off debt unless it’s the only way you can avoid bankruptcy or foreclosure. When your waters calm a bit, I think you’ll be able to reflect clearly and move forward smoothly on a well constructed plan. To your original question: I’m excited about the move too–long drive! Plus, you would pay ordinary income taxes on the amount you took out. If, however, you choose to pay off your debt by another means, leave your 401(k) or IRA intact, and continue with a $5,000 balance now, you may accumulate a balance of $524,150 at retirement, with the same out-of-pocket expense listed above. Joan, Thank you for such a detailed post on this. That’s not the point. If you already have a plan in place, a cashout CAN work for you. hi, I’m thinking of doing the same thing when, I currently have about $8,100 in debt my 401k account has $11,098 in it, I stopped making contributions to it because I need every cent I can get out of my check, the cost of living is horrible anymore…. If his company doesn’t offer a match, I would stop contributing to the 401k until the debt is paid off, but DO NOT cash out. I left a previous company 10 years ago and there was a stock-matching program separate from my normal 401k plan (although this was also technically a 401k, too). If your return on your investment is not significant and your debt is much higher than you might be better off paying that debt first and then may be start saving for the retirement. I personally like the idea of a shorter payoff time, but if I was in your shoes (assuming you have other fairly liquid assets) I would just pay off the house the year i retire. My thought is, do I cash out the 401K so that I have a new chunk (probably around $30k after taxes and penalties) for a downpayment and keep my existing property as a rental? Now here’s where our situation gets interesting. We are also facing a pair of job changes. About | It’s not really safe to drive 2 hours a week 😉 But we’re doing it anyway!! with the way this country is going… I bet most Americans (myself included) feel there’s no such thing as retirement anymore, I have accepted the fact that im probably going to die at work. It’s not something I would recommend unless you have a high amount of debt or under any normal circumstance. Just because you have money withheld from the disbursement does not mean you are ok…it means you have now given the IRS and state taxing authorities more money from you than you needed to. Don’t let the money touch your general fund. Of course, if one took out the 401K funds to pay off all their debt, they wouldn’t be declaring bankruptcy…. But that may not be the right move for you. However, if you are faced with large amounts of debt, you might be tempted to cash out your account and pay it off. Getting rid of the debt with such drastic measures made us face our spending reality and we have been far more careful since. I know that it was the right time for my husband to leave his job. I’d personally NOT use this money to pay off debt, especially with the money I’d lose. Maybe I’d use 0% credit card balance transfers or even peer-to-peer lending to get away from high interest rates. Good luck. I was already of the belief that cashing out a retirement account should be an absolute last resort, but this really puts that nail in the coffin for me. You made a sound decision based on the facts you have today and the assumptions you must make of the future. Wow, I had no idea this was the case. I would advise changing your thinking about your 401k funds. Very few people at Verzion work until they are 591/2, and this is how we do it. Anyone who had a well-balanced 401k portfolio certainly took a beating in 2008 – only to have all of that money returned (and then some) if they took the following steps: I personally don’t feel comfortable “cashing-out” or selling some of the “shares” of a 401k, especially when I still work for the company in question, however, I was wondering…How do those of you who have ongoing health issues deal with the expense of such issues, such as co-pays and making sure that they get covered? Steve Rhode, The Get Out of Debt Guy: Is it a bad idea to use a 401k or IRA hardship withdrawal to pay off credit card debt? Is it always the right thing to do? Absolutely not. We’ve heard too many stories of people who want to cash out to get that “once in a lifetime” vacation, or to pay for their dream wedding, or any number of other things that are absolutely fun, but absolutely not NEEDS. However, it’s extremely unlikely you’ll want to take a penalty to pay down a mortgage on an investment property. So the penalty was 10%. However, if you can pay back the amount you took out within three years, you can claim a refund on those taxes. If it were me, I’d pay down the CC and the smaller loan then kick a major portion of the 800 over to the new car loan. With a lot of prospective options, you might not understand where to begin. The bigger issue in my opinion is not the 10% penalty, it is the loss of potential growth on the account. Despite cutting the budget a lot, we racked up $17,000 in credit card debt. Paying off debt may not be easy, but it could benefit your future self and your current state of mind. i resign from my job want to start a small business with the four o one cash out i am 58 yrs old i need a lump sum to get started. If you are in a overwhelmingly negative situation – or considering bankruptcy – don’t do anything until you consult a local, trusted professional in your area. By putting your 401k withdrawal toward debt, you may be able to pay off your account in full. Good stuff to think about. Even if you are able to replace the 34k with increased savings through new opportunities, that new savings will be taxed first, while the 34k was in a tax-deferred status. The other is simply tax on that income based on your tax bracket (25 percent in Dave’s example). I’m also fine if some choose to not invest in the market at all, and invest in other ways (real estate, side business, etc…). The point is we don’t know what is going to happen tomorrow, next month or next year(especially the stock market), but you do know what you can do to make you happy today. I also lowered my 401k contribution to 6% so that I still took full advantage of my company’s match (3%) and was able to pay off the CC debt in a little over a year (paying $700-900 a month). Pros: Pay off debt sooner: In some cases, you may pay off debt earlier than expected. you can not be employed by the employer with the 401k account. Then, if your situation remains stable and you are still willing to take extra risk, I would think it best to keep your 401k where it is and just sell your townhouse to use your equity on the new home. Joan, I’m just distraught about the idea of you buying a better car! Add Comment. If you don’t have such a relationship, this is a little harder, but still VERY MUCH a must-do. However if you have job offers on the table for yourself and freelance contracts for your husband, it does seem an extreme thing to do flat line your pension pot. There are hundreds of resources that may be better for personally. I just did this for a much smaller amount around $14K before taxes. Paying off debt may feel like a never-ending process. I’m a fan of Dave ramsey and i think we should consider our future first for the sake of our kids so they don’t have to take care of us if we run out of retirement money. However, I do think you have made an extremely poor decision and if there is ANY possibility of undoing this action, it is in your best interest: Hi Joan, That retirement money is sitting there in one large chunk, and you know that it’s supposed to be used for many years’ worth of retirement income , but it’s also painful to let debts linger. Yes, you get a better expected return, but you become inflexible if any surprises arise. You’re right, there are other options and I don’t recommend a cashout “just to do it.”, Though I’m anti-401(k) broadly speaking, for myself, I would not have cashed this one out if there weren’t other situations at work; I’d have done what I’d done for the past 8 years, rolled it over and let it sit and earn what it could with no contributions. 6 Ways to Pay Off Debt Without Cashing Out Your 401k There are a few ways to become debt-free without cutting into your 401k. Given that the stock itself hasn’t moved up too much and because it’s not diversified into growth, small cap, equity, etc, type of investments, I’m thinking this may be a great move for me. Cashing Out My 401(k) to Pay Off Debt. So please forgive me if someone else has ask this and you have answered. I lost my job. That’s true. You have conquered roughly 40% of your debt, and considering the initial amount that is an incredible feat – gold star number 2 for you. If you still believe in the underlying power and concept of the 401k, and plan to start investing in another one, then why cash out of the first one???? Let’s say you have $20,000 in your retirement account and you want to withdraw it to pay off credit card debt. I knew today’s post was going to be kind of U.S.-centric and I DEFINITELY appreciate having a broader perspective! Cashing out a 401(k) plan may free up some money to reduce your debt… This may make you wonder, â should I... Full Story The post Should I Cash Out My 401k to Pay Off Debt? posts like this are incredibly short-sighted….. Did nothing (except manually rebalance) – lost more each year between 2009 and 2012 than I did in 2008. Second, being “done with this blog” doesn’t get a reaction. I wish you the best of planning for your future! Sometimes, the less logical choice is the better one, as it can lead to more happiness. I have a question? No profit; if I’m lucky I’ll get approved for a short sale and won’t have to pay the difference–hopefully (looks good so far). As her husband has quit his job and is going freelance and Joan has a few irons in the fire for returning to full time work. But it DEFINITELY is one that’s our top consideration. Something else to factor into the decision. Need a car? Also, based on this story, I would say that behavior has not changed enough. Not all applicants will be approved and individual loan terms may vary. It wasn’t an easy decision to make, and it isn’t without some serious ramifications. But for me, the growth of that small savings has been maybe my biggest motivation to get rid of debt once and for all so that I can start making up for what feels like ages of lost time (I’m also 30) and put all that money I’ve learned how not to spend to work buying my freedom! I think that’s a very valid point. In the United States, a 401(k) is a tax-deferred, employer-sponsored retirement plan. That could pay off the credit card debt just about. If you want to invest on something you can use before retirement, then you should consider a house. The problem is that if everyone declared bankruptcy then it collapses the whole system. If we do attack the debt, the total will be much closer to $25,000+, paid in one big chunk of about $12,000 and then a handful of about three to four smaller chunks totaling the same amount over the coming year. Colin, thanks for your comment! I have $17,000 in credit card debt that I’m tackling, and so my contribution to my 401k is low for now so that I can throw the bulk of my efforts at the debt. If you’re not making ends meet, a cashout is not an easy fix – at some point the money will be gone, and then what? However they say I can "CASH IT OUT" but with a mandatory of 20% Federal Income Tax plus 10% Penalty. We tried to I say retirement because that’s what people understand, but my plan is not to work full-time for many years and then stop working. Before you cash out a retirement account, there are a few things you should be aware of. However, they have been more than off-set by the following returns (2009 +42%, 2010 +18%, 2011 -6%, 2012 +17%, 2013 so far +24%). If you’re struggling with debt, it might be tempting to dip into the 401k cookie jar to relieve the pressure. Sure, you’ll eventually pay income taxes on it…..but much, much later after it’s had lots of time to grow. It’s important to understand the process of cashing out your 401(k) plan to pay off debt. There’s the 10% early withdrawal penalty, plus you have to pay taxes on what you take out. I am “concerned”. There are a few ways to become debt-free without cutting into your 401k. And I’m renting–home ownership is way overvalued as far as I’m concerned. Thank you for writing this, it was nice to know that I wasn’t alone. My wife cashed out her 401K to pay off debt. Lastly, why are your credit cards at these outrageous interest rates? However, we chose to “prepay” that expense by sitting aside a lump sum, therefore freeing up more money in our month-to-month budgets just during this transition period. That’s not for everyone – and it ONLY works because we operate on a very specifically laid out budget that assigns each dollar to a category, and because we’re taking that freed-up money and putting it toward debt. Korey. I want the debt gone for sure. Go armed with the exact balance in your account and as detailed of a set of current financial records as possible! Over the years, the total account has now roughly $34k or so and has only inched up from my vested $26k – not a ton because it’s 100% vested in the company’s large cap stock.