Cash Out 401K????

[emmajane1234]

Hello!!

I have been trying to do research on whether I should or should not cash out my 401K plan and all I have been getting is "DON"T DO IT!!" I am assuming this is good advice but I wanted to see what you all thought.....Here is my situation:

I am a 27 years old and am currently only making $31000 a year. I have about $6,000 in my 401K from my previous employer (my current employer does not match which my last employer matched 3%). I am currently not contributing to my 401K because of the financial hardships that I am in. I have around $4500 in credit card debt with about $3000.00 of it at a very high interest rate. My monthly payments are $50.00 on this account but $35.00 is charged every month for interest, so if I am only making the minimum payments, I am technically only paying off $15.00 a month....hardly anything. I really need to get this debt down.

I hardly have any money as it is now for extras as I am paying off my $15,000 school loan at $140.00 a month. I don't have a car payment but am paying close to $800 a month in rent.

At this time, my boyfriend (soon to be fiance) are living in two different states but we plan on moving in together in June when my lease is up and I have gotten good experience at my job. I would like to be debt free before we buy a house, have kids etc.

Also, my boyfriend just recently got a job with a company that has a very good sharing plan where they pay 3 to 1, meaning they triple what he puts in. He personally has almost $10,000 in debt and has chosen to cash out his 401K to get rid of that debt (since he is able to get it back quickly with the new job) Like I said, we would like to start debt free. I am living paycheck to paycheck with no money to save. With credit cards being paid off, we could start with a clean slate.

Anyways, here is my situation and I appreciate any help that you could give!!

Thanks,
EJM

[Broken Arrow]

Welcome, Emma Jane.

Well, I hate to say it too, but "DON'T DO IT!" Just roll it into an IRA instead. Your wage may seem meager right now, but at least you can still work, and it doesn't have to be meager for the rest of your life. This may not be true as you near retirement. Did I mention that you'll be hit with a 10% early withdraw penalty?

Also, can you elaborate on this 3 to 1 thing that your fiance has? That sounds very interesting.

If it means anything, I'm not debt free right now, and as you'll soon see, neither are many of the posters here. Debt isn't always a bad thing per se, and being debt-free isn't truly free if it means sacrificing your future to save your present.

Rather, I think what may serve you better is a better financial plan and accountability. Budgeting, tracking expenses, and a debt-reduction plan as well as continuing your savings and investing. There is more to this, but I'm getting sleepy, so I'll let the others chime in on this one.

[skydivingchic]

There is a reason everyone is saying "don't do it." First, you will have to pay taxes PLUS a 10% penalty for early withdrawl. Using the 25% federal tax bracket and assuming no state taxes, that's 35% right off the top. So you'll only be left with about $3900 - not even enough to cover your CC debt.

Second, if you withdrawl that money, you lose the compounding time. The time investments are allowed to compound is the single biggest factor in how much your money grows. So for your $6000, I'll assume 40 years to retirement with 8% annual returns. That money will be worth over $145,000 at retirement. There is no way to get the compounding time back and you can't "put the money back" later - each year your contributions are capped.

If you are willing to post your debts (amounts, interest rates, minimum payments) along with your income and expenses, the people on this forum are great about finding areas to save money. But cashing out a 401(k) should always be an absolute last ditch resort, not the first answer.

[Tree0164]

I am going to echo don't do it as well. Bad financial decision I did in my 20s with a $7000 401k when I left one of my jobs. I think I ended up with $3800.

You need to buckle down, make a budget and get aggressive about paying off the debt. Get a second job or work O/T at work and make a plan to getting this paid off.

I also second posting your budget... nerds (term of love everyone) on this board love helping out others.

[jIM_Ohio]

There are two problems at work here.

First is your spending- you racked up the debt on the cc by buying things you could not afford at the time. I did this when I was younger too.

Second, you need a plan to get out of the problem you are in now.

If you do #2 without fixing #1, you will have the same problem. My suggestion is to STOP spending. Make sure you always spend less than you earn.

I would look into rolling 401k from old employer into 401k at new employer, then take a 401k loan (3k, 50% of balance, will likely be amount of loan). Use this loan to pay off the cc balance of 3k. Make the 401k loan payment around $100/month and the money should be back into 401k within 3 years is my guess using simple math.

$1500 in cc debt would be left, if you could make payments around $75 to this each month, it should be gone in about 20 months using simple math.

To do these things you'll need a budget

rent
utilities
gas
groceries
student loans

what else do you spend on each month? cut out things like cable, clothes etc... until you have spending under control. Once debt is paid off in less than 3 years, you will have more money than you do now simply because the cc payments went away.