Should he cancel his 401k?

[buildmybudget]

A good friend of mine is worried about losing his job and came to me asking whether he should take the money out of his 401k to support his family if he needed to. Of course, my response was that it's one of the worst financial decisions that can be made because of the penalty and taxes, and of course double taxation if he takes any withdrawals in the form of a loan.

Did I miss anything? Is there anything else I should've told him about regarding this potential decision? Of course when it all boils down, he has to do whatever it takes to support his family. I told him that although it's a poor financial decision, you have to do what you have to do sometimes and this might be one of those times...

[Joan.of.the.Arch]

I guess you asked him about any potential to cut back on spending, whether he has other savings, whether he and any other adults in the household are currently job hunting, whether there are savings designated for college that could be opened before retirement savings, whether his more extended family will be able to help, whether he will qualify for unemployment benefits, etc.

[Vytautas]

It is a very poor idea to make withdrawals from his 401k due to the severe penalties. But, if your friend ends up losing his job and in financial distress, there is a hardship exception to the withdrawal penalty. I don't know the specifics but if he is unable to pay necessary living expenses with current income (meaning going into foreclosure or getting evicted) then the money in a 401k can be used to relieve this burden.

But from the sound of it, he is just worried he might lose his job but isn't to that point yet. I haven't been able to find any other exceptions that your friend could use to get past that penalty. If he is worried about losing his job, the best option would be to get an emergency fund built up if he doesn't have one yet and lower some expenses in preparation for the job loss.

It just isn't worth the 10% penalty in addition to the taxes that need to be paid on the 401k to withdraw early.

[creditcardfree]

Joan makes great points. There are a whole slew of other things to consider before withdrawing from a 401K.

He could stop contributing for a short time to build an emergency cushion. Of course, I'd cut back on spending now if I thought my job was in jeopardy.