If you withdraw your money from a 401(k) plan before you’re 59 1/2 years old, except for certain particular “hardship” cases: If you keep your money in the account until you’re 59 1/2 years old, when you withdraw it, there’s no penalty, but you DO still pay income tax. I have 60K in my TSP(401K), she has 150k in an traditional IRA (401K rollover). It’s not something I would recommend unless you have a high amount of debt or under any normal circumstance. 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…. Here’s the question we ask our readers:Â What will motivate you most to GET debt-free and STAY debt-free?Â. Not all applicants will be approved and individual loan terms may vary. And if we should choose to relocate, we’ll factor that in as well. I would actually NOT recommend that to most people we talk to, who either donât have a current budget, or their budget is very broad and not expense-by-expense. It has really got me thinking. I lost my job. One of your options may be withdrawing money from your retirement fund. When you cash out a 401k, you will have to pay a 10% early distribution penalty. Can they hold my money? Very few people at Verzion work until they are 591/2, and this is how we do it. If the 401K was from a plan in which the employer was matching more than 10%, then it seems like you’d come out ahead even with the penalty. I said it before, but it bears repeating: If you don’t have a plan for getting out of debtÂ for good, a windfall (whether it comes from a cashout, an inheritance, the lottery, whatever) is not going to change your life. I love my gardens and everything but all the work a house needs has detracted from my “real” work for a long time. We felt we needed to make a drastic decision to become debt free and stay debt free. That makes complete sense, Joan. Any ideas how I might go about this properly? This is where we deviate from the standard Man Vs. Debt advice, and I want to be as clear as I’m able to be about why. 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 $1 million in a 401k (albeit with a big impact to your credit score, and/or any other, non-retirement assets you have). appeared first on MintLife Blog. I’m 30. So not a real savings, not to mention the fact that you are losing on the earnings of that money for retirement. One of your options may be withdrawing money from your retirement fund. I lean very heavily towards the “don’t cash out your 401k” camp and don’t see how this was a great decision. Have you checked the law on owning a second home? I understand that the goal here is deby reduction, but borrow to acquire a second car would have come with a lower interest rate than that and without the serious hit to the overall net worth. Let’s see the specifics….. The credit card debt was gone in a few months. Age is a factor, too. 1.) Be Careful When Cashing Out a Retirement Account to Pay off Debt It’s tempting to dip into retirement savings when you’ve got a large debt to pay off. We do have some helps like we can do tax deduction for up to 1600$ a year or somthing ( not exactlly checcked the curreny exchange ) But it would end up in an account i dont have control over. If you cash out your pension after leaving a job, it's usually in your best interests to roll it into another qualified retirement plan. It cost us roughly $2,500 for that feeling and it … This isn’t something to be taken lightly. 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. Doing so could help you save on monthly interest payments. The most overlooked cost here is the magic of compound interest. Only 10 percent of the money you pay in taxes to cash out a 401(k) is a penalty. It’s not really safe to drive 2 hours a week ð But we’re doing it anyway!! There are many ways you can pay off your debt and bills before touching your 401K or your other retirement funds. Are you considering that for your family? I cashed out my 401k, talked me credit cards to lower there pay off balances and then started investing again. Something else to factor into the decision. Have you called all your creditors and asked for a lower rate? 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! With Steve Rhode, The Get Out of Debt Guy. If you are 58 years old it would seem wrong to me to take the 10% penalty. (2) I’m not sure how depleting your 401k is putting you in position to earn more money. Have I mentioned that my car has… needs? I also only have 1 emergency card right now that I use and pay off 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. The math wouldn’t allow me any other option. Plus the time/energy to make payments. 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. I think from reading your newsletter today, all of these questions are being considered. I carve out 50% of my “income” as follows: 40% to cover estimated taxes and 10% goes into savings to invest for retirement. Appreciate that. Generally speaking when people retire they make less income. My goal today is not to “convince” you to make or not make such a move. When I shared my monthly financial update last week (Big Decisions Involving Big Dollars), I said I had big news: Among other changes,Â I’d decided to cash out my 401(k) from my former full-time job. I have run the numbers, and know what the better “math solution” appears to be. However, if you are faced with large amounts of debt, you might be tempted to cash out your account and pay it off. 2. I don’t agree with what action she’s taken, however that’s because I’m not dealing with her personal circumstances and only seeing it as an onlooker. Maybe there are cases where cashing out your 401k for debt repayment – although in this case it seems that only about a third of your original balance might go to paying off debt – is the right thing to do, and I sincerely hope that this is the right path for you, but I still can’t help feeling uncomfortable that you’ve portrayed emptying out your retirement savings vs not emptying out your retirement savings as potentially equally good choices. Thank you. Dave Ramsey Vs. Suze Orman: Should Your Financial Guru Be Changing His/Her Advice? You mentioned that you didn’t have to cash in to pay for your tae kwon do and tax payments…..then, um, why do it? Maybe there are some details that you aren’t able to reveal which would make it make more sense, but this just seems like a bad, bad idea. 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. Lane – was the loan a 401k loan? I’ll have no debt except for my mortgage (not underwater), will still have a significant 401k balance, and will be repaying the $47500 to myself over the next 3 years. 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. Im 30 years old and transitioned to a MUCH higher paying job (with a 401K that im contributing 10% to). Either way, the pledge has got to be NO NEW CHARGING! Was laid off. Thanks, OC. It will set you back significantly in saving for your retirement. If a person is in debt (whether great or small), you have obligated yourself to paying back those you borrowed from. No robbing my retirement funds. Especially during any period of transition! Cashing out 401k accounts is typically not a sound financial strategy. And I’m renting–home ownership is way overvalued as far as I’m concerned. We will be getting just under 25k and we happen to have 24,500 in CC debt. 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. Also, it sounds like your a bit giddy about a bigger place (your dog doesn’t care, really) Let it settle, think about it, do you really want/need a bigger place to fill up with S-T-U-F-F? Pros: Pay off debt sooner: In some cases, you may pay off debt earlier than expected. That’s true. Cay, that’s part of what I didn’t get into here (the family piece) and that’s a VERY good question. I also have 52k in student loans that I wasn’t paying on (in deferment) in addition to mortgage and car payments, vacation payments, motorcycle payment. It sounds like you’re using 401k to pay for a master’s program in tae-kwon do, which to me is a want, not a need. To get back on track, we took $10,000 out of a college savings account and $3,500 out of my Roth-IRA (both had a 10% tax penalty). I know you have mentioned you want to be very transparent regarding this site. This may make you question, ““ should I squander my 401k to settle financial obligation?” ” Cashing out your 401k early… 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. 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. 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