Laid off, need opinion for 401K.

[badluckstreak]

Let me give you my situation and financial background here.

I am 31, laid off last week, live in Ohio where there are no jobs atm. It is likely I will have to move to find a job.

I have been saving money on my own vs. 401K to put on a house. I considering buying a house and getting it paid off before retirement by biggest retirement plan. That is money I 100% don't want to touch for anything but buying a house. I have about 1/2 to 1/3 of what I will spend on a house.

My total debt is:

$5400 on college loan@ 4.75% interest
$3000 on a credit card @ 7.9%
$10,500 on a car loan @ 6.75% interest

Besides my house savings I have $5000, I will be getting $335 weekly on unemployment.

My 401K from this company I just left is minimal, it lost a lot and I only have $4500 and 30 days to get it out.

I have the following options:

1. I heard, but don't know how, that you can rollover into some type of CD without the tax penalty. I was told it has a good return. Anybody know anything about this?

2. Rollover into an IRA, it would be the same portfolio I have now, that I have lost over $3000 on over the last year.

3. The generally disliked idea from what I have read: Cash the 401K, like 30% is taken out giving me ~$3000. If I did that I would put my $8000 on paying off the car. I would be able to have the car payed off buy the end of July and clear $350 a month out, I could use that to restore my retirement plan when I get a job, make less money, or whatever necessity.

Number 3 seems like a best option for me considering the small amount of 401K I have here, and the economic situation. I have friends without work for over 6 months now, it could happen to me. If I run out of unemployment, have a medical situation, or whatever the 350 a month could kill me. I also view it IF I do get a job soon it would be nice to be rid of the $350 so I can get that house before the housing market booms back up.

If I had $8000 or more I would rollover without question, but I just think $4500 is not much and the interest on the car might be more than what I would benefit in savings. What is your opinion?

[watsoninc]

I would roll it over into a Roth IRA. Since you are not planning on retiring soon, you can invest for the long-term. Cashing out a 401K is like borrowing money with a significant penalty plus whatever your tax rate. Many people end up paying about 40% between taxes and the penalty.

[badluckstreak]

Originally Posted by watsoninc

I would roll it over into a Roth IRA. Since you are not planning on retiring soon, you can invest for the long-term. Cashing out a 401K is like borrowing money with a significant penalty plus whatever your tax rate. Many people end up paying about 40% between taxes and the penalty.

I had planned to do the Roth, but I was told if I transfer it to a Roth I will still get the 20% tax penalty. I am not sure if that is true or they want to make sure I keep my investments with them.

Also I have read the 40% penalty deal, but where is the 40% from? All I have read says 20% plus 10% for taking it out early.

[watsoninc]

You should not pay any penalty if you do an IRA rollover provided that you do not touch the money at all. Contact a discount brokerage firm (i.e. Sharebuilder, Scottrade, etc.). They can help you broker the deal.

The 40% comes from your tax rate (most people have a 25% tax rate) plus the penalty (somewhere around 10-20%).

[jimmyengland]

if you roll over to a roth you will owe money on ur taxes since you are moving from a pre tax to an after tax account... if i were u i would roll over to a traditional for the time being. get yourself a new job and move on with life

[badluckstreak]

My understanding is Ohio takes a week off of unemployment pay if cashing out anyway. I am going to do the IRA rollover Monday.

[badluckstreak]

Originally Posted by jimmyengland

if you roll over to a roth you will owe money on ur taxes since you are moving from a pre tax to an after tax account... if i were u i would roll over to a traditional for the time being. get yourself a new job and move on with life

That is what he told me, thanks.