I believe it’s the right time for me to pursue some opportunities that have come into my path. I would like an opinion. On legalities. As the years passed we went from one balance transfer to another with varying levels of debt from a low of a couple grand to 32 grand. With so many potential solutions, you may not know where to start. I also only have 1 emergency card right now that I use and pay off Add Comment. Should have read… “But peace of mind of a shorter payoff time…”. Brendan, I am not a financial adviser, but a few things to consider: In our case, the compound interest on our credit cards was certainly a much bigger problem in the other direction, but at the same time – that’s a HUGE part of why we have such an aggressive plan to pay off all debt and save heavily – because we want to build wealth with the same speed and agressiveness we’ve tackled debt! With a lot of prospective options, you might not understand where to begin. (3) Quick story – It took me 10 years to get my 401k balance over 50k, then only about 5 more to hit 150k, then less than 4 to hit 300k……sure, I’m putting in a lot more now than I was when I started but I think you see the point – I’m still contributing but the gain/loss of my 401k is now driven more by the market performance than by my contributions. 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). 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. Also, based on this story, I would say that behavior has not changed enough. The psychological benefit has been unbelievable! Early withdrawal from your 401k could cost you in. But since this is a personal finance blog at it’s core, let’s at least try to educate people a little. 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. A cash out would allow me to pay off my home in full. I want the debt gone for sure. 6 Ways to Pay Off Debt Without Cashing Out Your 401k. It really is dishonest to declare bankruptcy just because you’re in a difficult situation. If so, that’s a tough spot. Leaves me with a $410k mortgage. It turns into kind of a semantic thing – for my tae kwon do, we actually had (and had already been paying with) money budgeted from our monthly budget for that “want” expense, and chose to take the cash and sit it aside now instead to clear out that monthly category in the budget. 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. But I know what motivates me – and our family. Clearly I was mistaken. Yuck! Took small loan over year ago. There’s nothing worse than unexpected car repairs to set you behind and stress you out. Among your choices might be withdrawing cash from your retirement fund. 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. The money will be gone, and with no system in place, you’ll charge the next big problem that comes your way. Paying off debt may feel like a never-ending process. Before withdrawing from your 401k, there are some pros and cons to consider before cashing out early. I will worry about paying back our retirement but not nearly as much as paying back 25k and student loans and still being able to LIVE. (127), Debt Tsunami: The Ultimate Method To Pay Off Debt (149), Would You Rather Be Fat or In Debt? Cay, that’s part of what I didn’t get into here (the family piece) and that’s a VERY good question. (1) do nothing Here you go: http://www.kbb.com/ You probably know about this but thought I’d mention. 24 Quick Actions You Can Do Today That Can Change Your Financial Life Forever, 42 Ways To Radically Simplify Your Financial Life. This may make you question, ““ should I squander my 401k to settle financial obligation?” ” Cashing out your 401k early… (That’s not bad – it’s just not “me!”) One thing I would love to encourage you to do, though, is to read a variety of perspectives on the subject. I would never cash out a 401k to pay off debt. If you were to ask me if I would cash out my 401K to pay bills or pay off debt, I would not, unless it is my absolute very last resort. One of your options may be withdrawing money from your retirement fund. I think my only main concern is the comment where you say taxes you will pay anyway. Once the money arrived, our first step was to pay our third-quarter federal, state and local tax estimates (goodbye, approximately $4,900!). You started with $55,000 in debt and $35000 in assets. I have 2 rental properties. Getting rid of the debt with such drastic measures made us face our spending reality and we have been far more careful since. Our biggest issue is our vehicle. Wow, I had no idea this was the case. It could be the same for you. The other part of your decision is personal and I believe that folks need to do what they feel makes the best sense for them, but only after they get financial advice on the consequences of what they are about to do. Kumiko, Thank you for helping me get off to a great 2019, I have learned alot! By putting your 401k withdrawal toward debt, you may be able to pay off your account in full. They weren’t – and they still aren’t. There are many people for whom retirement accounts are a great choice. Doing so could help you save on monthly interest payments. I’m getting the home with “0” down at 3.75% fixed. You sound like you have a plan for savings for your “retirement.” From the pass two years of newsletters, you are following thru with your plan to become debt-free and live that way. Doing so could help you save on monthly interest payments. If you are willing to take more risk, then I would consider the 401k or other investments with a higher return. It is not true that you can’t touch your 401 until you are 591/2 without a penalty. I currently fall into the 25% bracket so saving 10% would be great! If you find yourself in a position where the only way out of your debt is to cash in your 401(k), you have bigger financial problems that need rehabilitation anyway, says Benjamin S. Offit, CFP® of Clear Path Advisory. you could have brainstormed with the community here and found numerous cheaper alternatives to stay motivated rather than cashing out your retirement. so yes, it may be true you may have saved in interest on your debt, but you instead gave it to the IRS/State instead of the banks. With so many potential solutions, you may not know where to start. 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 … One strong contender would have me working about 2 hours from home in an area lacking public transportation. My take on this is simply that I agree – if you’re not planning to be debt-free for life and to fully fund your retirement savings in some way, it’s a terrible idea. Not so exciting to spend it as soon as you know you’re going to be making it though. I also like your plan to buy a new car with cash–I did exactly that back in 2006. Only the future will tell if you actually made a good decision. Buy a new car after you’ve saved enough cash to do so, and not a minute before. Right now cashing out your 401k was worked out with the accountant. To be fair, I am living on more than the 50% I allocate for living expenses. Im thinking of selling my current house (have about $40K in equity) and purchase another that affords my family (and dog) more space. Am I far off the mark? First, you’re penalized when you borrow against your retirement plan. I you had ANY sort of investment options that were diversified over that time, it would have been virtually impossible to not make a great return. I am considering cashing out an old 401k to pay off 2nd mortgage so I can sell my house without losing any money. Should I Borrow From My 401k Account To Pay Off Debt? Much like the 401(k) decision, that makes it sound like a mathematical equation, which it decidedly isn’t. She recalculated our estimated-tax payments, made suggestions on what to withhold at the time of the cashout, and more. I’m thinking of cashing mine in to pay off our mortgage, car, credit card and medical bills, putting any balance into saving. Especially at the Autumn of your life. Just having a piece of mind I can start fresh (I have not charged my credit card in at least 2 years and have been paying it down) and do not believe in CCs unless of an emergency. I will pray for you and your family as your map out your life plans. Thanks, OC. With a lot of prospective options, you might not understand where to begin. I can tell you by the time you replace 34k in savings, the 34k you just forfeited would be A LOT more. You only have to wait another year and half to avoid that loss. 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. The same was true for my tae kwon do payment. Being 30, you have more years to save than I do at this moment. Taking money out of your 401k or IRA may make sense for some and not for others. Plus paying off two things rather than one will help your overall credit. 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. Would like to have house paid for by retirement (in probably about 15 years). I knew you had the financial part down pat, esp based on your past newsletters!!! I really hope that this is our “easy” way to being debt free. Google 72T and check it out; maybe it will work for you. I am “concerned”. If lower rates on the existing cards aren’t possible what about another consolidation? If I calculate my immediate income, state and penalty, I believe I will end up with around $16k-$18k of it. The monthly payments are getting to high to pay due to the rising of interest rates. The bigger issue in my opinion is not the 10% penalty, it is the loss of potential growth on the account. It’s earning some interest (not investment-level interest, but again, our timing was limited due to factors beyond our control). Our plan is to spend November hammering out our employment situations and choosing the options that are the best fit in that area. But peace of mind of paying life of shorter payoff time is quite attractive – plus, my monthly house payment will be about $600 less a month. ! I believe whole-heartedly that this only works in conjunction with a debt-free-for-life plan. That’s what I want to build here – a growing list of things to think about! 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. 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. Im a COAL MINER and my job might not be around much longer. So for the piece of mind it gives her she’s doing the right thing for her. Joan, Advertised rates on this site are provided by the third party advertiser and not by us. 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. Then, take the money you’re NOT paying on those debts – again ALL of it, not just some – and put the same dollar amount for maybe 2 or 3 months into a savings account/emergency fund of some kind. Our biggest concern for readers who  end up being able to pay off debts using “big” methods like this is that, if you haven’t built the habits and the foundation, you’re going to end up charging the next thing, and then you’re no farther ahead. Paying off the house would allow me to keep my same lifestyle on a lower salary. Dana, that is a huge point. Even with all the taxes and fees that come with early 401(k) withdrawals, many folks are not deterred from raiding their nest eggs. Are you considering that for your family? Yes, there may be additional reasons (such as lack of discipline to save without a 401k, or a very generous employer contribution), but those are rare. you can not be employed by the employer with the 401k account. Read on to find out more about the downsides to using your retirement funds to pay off your credit card debt. Budgeting Basics: What Is An Emergency Fund? I’m hoping with the CC fully paid off, EVERY cent going to debt that we will be able to increase our 401k deductions to 25-35% to off set the tax and penalties and start paying down my student loans. I’m not saying “never use a 401(k) because Wall Street,” but I do think it is as much a mistake to put all one’s eggs in a 401(k) basket as it is to rely wholly on Social Security or any other *one* source of retirement income. We hit the nuclear option. 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. From what I’ve been able to discern, other than paying out a small fortune in taxes/penalties and losing the gains over time if left alone, most opponents don’t believe in the personal intent/conviction to change spending habits and/or do what’s right once the choice has been made to cash out. I believe this move is not a strong financial choice in the short run, but could be fantastic for your long term progress. Another option available is to cut back on contributing to your retirement plan in order to free up a little money to aggressively pay off high-interest rate credit card debt. So maybe I’m just not getting it, but total after u would pay off taxes and with old for them how much did u end up actually having . i.e. It might not be the right choice for everyone but our discover card with a 12,000.00 balance and 2 promotional rates was still charging 130.00 a month interest and our min payment was 241.00 it would take us 40 years to pay that off. Sell Your Crap | I have 8 payments left on my Chapter 13. I only have a home equity loan which is variable but has remained at 4%. If someone writes to us planning to take a cashout, the advice we give is to use ALL of it to attack debt. Rich, I cannot WAIT to join you in that feeling!! So we’re doing the best we can by putting the money aside in savings until we hammer out the following moving parts. I find it very interesting how many people say… “never cash out.” In some scenarios, this is the equivalent of saying to a drowning sailor, “wait, don’t pull the cord on your inflation device now, you may need it later!” This is complete BS because the fact is… NOW may be your LATER! Ha, thanks, Travis!!! In the end it depends on your choice of risk level, which is personal. I’m in nearly the exact situation as you and your husband were in. Joan, I commend you for setting yourself free, and wish I had the same courage! 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? For me and my wife we have always had some level of debt since our early 20’s. I was so excited for you and your choice to home school and spend lots of quality time with family. Need a car? No escaping it. If we get a car, it’s to get a second car – not getting rid of this one – because we believe this one will last us MUCH longer and can be a huge asset to us. Sell your crap. I’ll share my exact dollar figures in just a few minutes – and explain why I was willing to take the 10 percent penalty. Mostly, I want you to first know the basics of what we’re talking about. 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. But in the situation we were in, we definitely were in a better position tax-wise to do this for 2013 than in 2014 (due to what you mention – income changes). Is It a Good Idea? Here's why. 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. Should I cash in my 401K to pay off my house. I do the carve out at the time I deposit the check and the funds for taxes and savings are held at different financial institutions. Paying off debt may feel like a never-ending process. 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. With so many potential solutions, you may not know where to start. Thank you for the clarification! 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. Early withdrawal from your 401k could cost you in taxes and fees as your 401k has yet to be taxed. I’m enjoying your posts and look forward to reading more! Thoughts on which route to take? Our house is not underwater – JUST BARELY. In those cases, we tend to strongly caution against a cashout. We’ll tell you this: Take a look at your Debt Tsunami, hit the debts that tick you off the most, or that free up the most cash in a month when they’re gone, and obliterate them. Right now, our move was to put that excess 401(k) cashout money into a separate savings bucket. Dojo, that’s an interesting point. If debt is causing daily stress, you may consider serious debt payoff plans. And here at Man Vs. Debt, it ranks among the most frequent decisions on which people seek our input: Should I cash out my retirement fund  (or other savings vehicle) to pay down my debt? 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. cashing out a total of $33,000 to pay off the rest of the cards, the taxes (25% bracket) & the 10% penalty. Go armed with the exact balance in your account and as detailed of a set of current financial records as possible! 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. Selling personal items and liquidating accounts can generate money you can use to pay down your debt. Cashing out CAN work, but only if you have a plan for the future. 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