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. Korey. You talked of a 2 hr commute to a new job opportunity. 2 – Very good point and something i’ve considered as well. Right now, I’m paying down my house early with extra payments However, I’m seriously considering to cash out my old company’s 401k investments for which I’m vested to pay off my house. Using your 401(k) to pay off debt to avoid bankruptcy may not be the wisest move, given that U.S. bankruptcy courts generally shield retirement accounts. I also received a "Pension" from my previous employer of $4,800 of lump sum where I can … You being 30 and me being 50 is a part of the thought process here. I’m sorry I didn’t get into that more – that’s a great point and one I should have given more clarity on! The stock market is also more liquid and you are not committed to a payment. The interest rate is much lower than my credit cards and at the rate of my current pay situation, it was going to take years to pay off. I have never in my life been this determined to live below my means, pay off my debt and work toward my goal of taking a sabbatical from work to spend time with my son. That’s right — you could have $25k in credit card debt, $1 million in a 401k, declare bankruptcy, discharge the $25k in credit card debt, and still have the $1 million in a 401k (albeit with a big impact to your credit score, and/or any other, non-retirement assets you have). If someone writes to us planning to take a cashout, the advice we give is to use ALL of it to attack debt. You’re not only paying the 10% penalty, but you’re losing tons of future interest by pulling the money out. How about taking the focus off debt repayment and explore some new hobbies or activities with your daughter? The personal part of this plan is where I was coming from! Then, the plan is, if we need it, use the money to pay cash for a decent (better than our current) car that would become our primary vehicle. Yes, I completely agree that there are other ways of saving and accruing for retirement, there is no way to regain the years of compounding that you have just wiped out. But IF you can stick to it, you can make a lot of up-front progress and free up some cash flow to build an emergency fund. 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. There’s a lot of work/hassle involved. Regina. But the key word here is retire. So the difference here is the 10 percent penalty. The cost of the early cash-out is high, but not as high as a bankruptcy or foreclosure. Plus, you would pay ordinary income taxes on the amount you took out. So we’re doing the best we can by putting the money aside in savings until we hammer out the following moving parts. I’m glad you made a decision that worked for you! My exact retirement amount balance at the time of cashout wasÂ $34,507.26. Especially as it’s been put into savings rather than immediately paying things down. We tried to I’m voicing my opinion here not to make you feel bad but instead to try to persuade anyone tempted to do the same to think twice. You didn’t spell it out in those terms in the post. I needed that security of no car worries as I set out on my new life (so to speak), and I’m glad I did it. If nothing is contracted or formally agreed her family needs to live, eat and at least service the large debt she has. But when a perfect storm of expenses and income loss (government shutdown w/no backpay) and bad timing for stuff happens, being smart with a sudden influx of cash can help tremendously. OR Thanks for your transparency here. would that improve the “math solution”? So the penalty was 10%. Plus, I’ve often read advice about cashing out in your 20s or 30s isn’t that big of a deal, all things considered. You also talked of moving closer to said job. If cashing out your 401k improves how you feel, your outlook, your happiness, you are more likely to succeed in the next phase. Unfortunately, most people are creatures of habit and tend to revert back to their normal spending behavior sooner than later. 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 have a solid repayment history. Should I cash out part of my 401k to pay off my 136,000 in credit card debt? Say for instance your $40,000 debt is on a credit card at 16% interest. Brendan, Congratulations on your new job! Sarah, talk to a local professional about any decisions. 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. Cashing Out My 401(k) to Pay Off Debt. I’m in nearly the exact situation as you and your husband were in. Read on to find out more about the downsides to using your retirement funds to pay off your credit card debt. The proof will be in plain sight. Should I cash in my 401K to pay off my house. Im thinking of selling my current house (have about $40K in equity) and purchase another that affords my family (and dog) more space. 6 Ways to Pay Off Debt Without Cashing Out Your 401k There are a few ways to become debt-free without cutting into your 401k. It really is dishonest to declare bankruptcy just because you’re in a difficult situation. We are at a near record high for the stock market. However they say I can "CASH IT OUT" but with a mandatory of 20% Federal Income Tax plus 10% Penalty. (I generally don’t show our net worth calculations, though I have in the past, in my monthly updates, but there are a number of factors at play and it’s been well in the black, amazingly, for more than a year, which is a huge accomplishment!! The desire to cash out your 401(k) is strong when you have large amounts of credit card debt. It’s important to understand the process of cashing out your 401(k) plan to pay off debt. Swedish dude with about 109831.40 US Dollar in debt ( student loan, mortage, motorbike, creditcard(1200$ as we dont have the same creditcard culture over here event tough its comming) ). We definitely put a lot of thought into things – and in particular I have to applaud your decision about your car. The 10% penalty being the only difference is not necessarily true. It is also a burden on our economic system and holds no honor. This isn’t something to be taken lightly. Is It a Good Idea? However, we essentially made the decision to “prepay” those budget categories to free up money month-to-month in this transition period. ”. This was well worth the $55 for the consultation.Â 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. Tens of thousands lost due to lost compounded returns and penalties…yet this this is rationalized by a short-term cash flow? We’d been doing that intentionally and at the advice of our accountant, and at the time of this withdrawal, we were days away from paying our third-quarter estimates, which had already been figured to take into account the money we’d owe from cashout. Pay Off Your Debt |
We, like many, had a job loss. (As an example, my last day of employment for 401(k) purposes was June 30, 2013, and I was not able to request the cashout until mid-September!). you can not be employed by the employer with the 401k account. We felt we needed to make a drastic decision to become debt free and stay debt free. If you go the full debt repayment route, this gives you $44,000 in debt, zero dollars in assets for new net worth of -$44,000. That’s not the point.Â If you already have a plan in place, a cashout CAN work for you. When your waters calm a bit, I think you’ll be able to reflect clearly and move forward smoothly on a well constructed plan. I learned that my father in law did the same thing and has been working a ton of overtime to pay it back (the company lays it’s employees off frequently). I have 2 rental properties. It seems to me that you’ve taken ~$34,000 and turned it into $12,000. So thank you Joan for sharing your story and sharing your reasons. Thanks for the post. I am considering using one of the 401(k)s to pay off debt. Deciding to cash out your 401k depends on your financial position. 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. Im a COAL MINER and my job might not be around much longer. But you are cutting off your nose to spite your face to cash in your retirement instead of getting a comparatively cheap car loan.Yes the goal is to be debt free but it seems like you are spending a lot of extra money to get there. For example, I have a bill from last year that is a little over $4,000.00 from when I was in the hospital that wasn’t apparently covered by insurance and I have a collection agency calling about it. She’s taken a decision, and shared it. So please forgive me if someone else has ask this and you have answered. MANY of our MvD readers are our age – late 20s, early 30s – or younger. Plus paying off two things rather than one will help your overall credit. Paying off debt may feel like a never-ending process. i.e. Money taken … We just needed this as a leg up to start at zero. I’m not saying it’s always a good idea (see above!!) Thanks, OC. Thank you for such a detailed post on this. I have had to cash out a 401k before (not all nor most of my 401k balances). Thank you for presenting a reasonable “other side of the story” for us to consider! Maybe I’d use 0% credit card balance transfers or even peer-to-peer lending to get away from high interest rates. I’m disappointed that that aspect wasn’t covered in this post. If a person is in debt (whether great or small), you have obligated yourself to paying back those you borrowed from. I have roughly $6k in CC debt and another $8,500 remaining in 1 car loan and another $17,900 in another car loan. However, we’re committed to being debt-free for life – and we plan to not at any point borrow for a vehicle again, thankfully! Two things, first I hope you don’t always assume the worst in people. (Remember, when you put money into your 401… Here is why. Let me be super-clear that cashing out a 401(k) is NEVER a blanket yes-or-no move.Â There are dozens of factors to consider, from motivation to mathematics to age to lifestyle choices to the job market. I knew today’s post was going to be kind of U.S.-centric and I DEFINITELY appreciate having a broader perspective! is it possible to make smaller withdrawals over a few years and pay off the principal faster? My interest is in hearing how you’ve handled similar decisions – and what resources you’ve drawn on to help make those difficult choices. Cashing out 401k accounts is typically not a sound financial strategy. 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