Is there a "smart" way to cash out IRA & 401K?

[bcddj]

Hello,

I have accrued about $53K in credit card debt paying for college and I have $84K in IRAs and $12K in a 401K that I would like to consider using to pay off this debt as quickly as possible. I do not own a home and my salary for this year will be about $30K, so I don't think I have any other options.

I understand that I will incur taxes and early withdrawal penalties, so I'm looking for tips on how to minimize these consequences where possible.

Any suggestions or advice?

I would also like to know if the taxes due and penalties can be paid out of the cash I will be withdrawing?

Thank you.

[kv968]

Although I would highly recommend not to touch your retirement savings to pay off debt, if that's your only option then so be it. If your IRA is a Roth then you can take your contributions out without taxes or penalties. If it's in a traditional IRA then you'd have to pay taxes and, if you're younger than 59 1/2, a 10% early withdrawl penalty. I don't know of anyway to get around that.

As far as your 401k goes, the only way you could get around paying taxes and penalties on that is to take a loan against if your company permits it. The only problem with that is, A) you'll still have a payment as you pay back the loan and B) if you leave the company or are fired while the loan is outstanding, it will be considered income if you can't pay it back within a certain period of time (60 days or so I believe). I don't know of any other way to minimize the taxes and penalties unless again your IRA is a Roth.

[safari]

Just curious why you paid for college with a credit card? Educational loans carry very low interest, compared to credit cards, so you wouldn't have to be in a hurry to pay it off.

[PrincessPerky]

Considering we had a family of 5 (with a house payment) on that 30K last year, I do not see why you cannot pay it off. Not this year maybe, but in 3-5 definitely if you are single.

But regardless, don't feel bad for paying college on a CC my husband did it too, no idea why and I do not recommend it, but you are not alone.

[bcddj]

Thanks everyone for the feedback.

I did receive some assistance through educational loans but it wasn't enough, so I paid what I could in cash and used credit cards.

Being able to support a family of 5 with a house payment on 30K gives me some hope, but I also need to rent an apartment in the next several months and I figured that this much debt might prevent me from qualifying for one. Any thoughts on that?

[Keen]

Hello bcddj,

If you feel up to it why not list your CC debt by card and % rate and then list your other bills/debts...folks on this board can be very helpful in budgeting and giving cutting spending advice etc. As far as the apt rental goes I would say rent the cheapest safe place you can find and then buckle down the budget.

I cashed a small 401k ($12,000) about 10 years ago in order to pay for part of my MBA...The MBA has paid for itself may times over but I still wonder what the $12,000 would be worth today if I had left it alone...

PS I cashed the 401k the year I was in school full time with no other income therefore I did not pay taxes on it (as my income was only 12k for the year they withheld taxes but I recived it as a refund at the end of the year) So I guess that was a "smart" way to cash in a 401k.

I still regret it...

[vsjhoc]

Originally Posted by bcddj

I would also like to know if the taxes due and penalties can be paid out of the cash I will be withdrawing?

I believe the 10% penalty is automatically deducted when you cash out. I'm not sure about the taxes.

Originally Posted by Keen

I cashed a small 401k ($12,000) about 10 years ago in order to pay for part of my MBA...The MBA has paid for itself may times over but I still wonder what the $12,000 would be worth today if I had left it alone...

Hey, you've got an MBA, you could easily calculate what the $12,000 would be worth!

But don't do it. Don't beat yourself up about mistakes you made a long time ago. Or even not so long ago. Look forward. That's what I try to do.

(Now, if only I had done X ... when Y ... then Z ... )

[tinapbeana]

actually, my experience is the 20% taxes are taken out up front and the 10% penalty gets calculated and remitted if necessary when you file your taxes for the fiscal year. in the case of the MBA, chances are they penalty was deducted from his refund... bear in mind that the 20% that is taken is federal only, which means if you live in an income tax state you could have an ugly surprise when you file if you don't prepare for it.

[vsjhoc]

Originally Posted by tinapbeana

actually, my experience is the 20% taxes are taken out up front and the 10% penalty gets calculated and remitted if necessary when you file your taxes for the fiscal year. in the case of the MBA, chances are they penalty was deducted from his refund... bear in mind that the 20% that is taken is federal only, which means if you live in an income tax state you could have an ugly surprise when you file if you don't prepare for it.

Do they take 20% irrespective of your actual federal tax bracket?

[tinapbeana]

20%, off the top, reported on a 1099 at tax time... theory is it'll all even out in the end when you file and get your refund on the overpayment. in reality, you'll likely wind up using any refund from the fed tax overpayment to pay the state's tax bill for that income...

[MonkeyMama]

Actually, the amount that is withheld is what you request to be withheld. I just checked some online broker withdrawal forms because I keep seeing all these "they will take x%" posts which I did not think is true.

It depends where your money is but frankly you can withhold whatever you want. Just ask (most forms have a blank to fill in your % withholding). If not - write them a letter or call if you need to have more or less withheld.

Don't forget state - many states will charge taxes and penalties as well.

Figure the penalty in how much you withhold. If your tax bracket is 15% (likely) you should withhold 25% federal to cover the tax and penalties.

Then check your state - you may need to request they withhold state taxes for you as well...

No broker will automatically withhold anything - you select what you want withheld when you fill out the distribution forms. They have to ask you if you want taxes withheld - it is ultimately up to you. If they don't, the ball is in your court to ask them to withhold the proper amount.

[tinapbeana]

Originally Posted by MonkeyMama

No broker will automatically withhold anything - you select what you want withheld when you fill out the distribution forms. They have to ask you if you want taxes withheld - it is ultimately up to you. If they don't, the ball is in your court to ask them to withhold the proper amount.

merril lynch automatically witholds 20% if you complete your disbursement via their phone system. the way their phone system is worded it sounds as if you have the option to a) take the phone disbursement or b) receive the paperwork in the mail and take 30 days to review whether you want the disbursement at all. there is not mention that completing the paper version will allow you to change the amount that is withheld in taxes.

not that i'm saying the paper packet WON"T let you change the percentage, or that monkey mama is wrong: she's the pro! however, in real life, i'm guessing the vast majority of people simply take the phone system disbursement and never opt for the paperwork packet that would allow them to adjust the percentage of taxes withheld.

[anonymous_saver]

Originally Posted by bcddj

Hello,

I have accrued about $53K in credit card debt paying for college and I have $84K in IRAs and $12K in a 401K that I would like to consider using to pay off this debt as quickly as possible. I do not own a home and my salary for this year will be about $30K, so I don't think I have any other options.

I understand that I will incur taxes and early withdrawal penalties, so I'm looking for tips on how to minimize these consequences where possible.

Any suggestions or advice?

I would also like to know if the taxes due and penalties can be paid out of the cash I will be withdrawing?

Thank you.

I agree with the other poster. Post your amounts, limits, and interest rates of each of your cards. I bet we can try to figure out something before you take out your retirement money. It's at least worth a try!

Also list other debts if you have them: medical, school, car, etc.

[autoxer]

Originally Posted by bcddj

I understand that I will incur taxes and early withdrawal penalties, so I'm looking for tips on how to minimize these consequences where possible.

Any suggestions or advice?

Is any of the money in a Roth IRA? ... with a Roth IRA you can withdrawal the contributions without any penalties or taxes.

[MonkeyMama]

Actually - no because I just moved money out of MErrill Lynch and had none withheld.

BUT I was doing some research - thinking of an article on the subject and finally came across the 20% figure. It looks pretty standard if you move money out of an employer plan (401k) for them to withhold 20% federal. IRS rules actually. If it is a direct transfer you avoid it - but if you take the money it is automatic 20%, and maybe state too (depends on state).

If it is an IRA you should fill out a form with your wishes but if not an automatic 10% is withheld.

IRAs if you take the money you can request any withholding or none. Employer plans, do a direct transfer to avoid withholding, or they may have to withhold 20%.

I was thinking of doing an article on this and frankly got completely lost. I at first though the confusion was due to state by state requirements (could be) but it also depends on the type of plan. & then it depends on the broker if they will allow you to withhold more or elect none, but most should if you ask. I am not sure I got it all figured out - I give up - LOL. But had to apologize for my wrong info. I didn't realize employer plans had a different rule for direct transfers than otherwise. Because IRAs certainly don't. & I have no idea why the IRS chose 20% - very random. They are assuming you are in the lowest tax bracket plus penalty I guess.

ROTH IRA - oh yeah - no withholding required so if you don't indicate anything nothing is withheld.

[MonkeyMama]

Yeah if you do anything by phone or anything a lot of the IRA distibution forms I looked at said automatic 10% if you don't inidicate, 20% for employer plans. So just know you can fill out the paperwork (or call) and that you have options with IRAs. I think the percentages are pretty arbitrary. Too much if you rollover, but not enough for most people cashing out.