Cashing Out IRA

[Betz2]

My husband took a new job two years ago - so we took his 401k and put it into a rollover IRA. It (the IRA) has about $22,000 in it right now.

WELL - we got in over our heads over the last year and had to use our credit cards; house issues (hvac went out, fridge went out, garage opener went out, etc.). And now - we're barely making it from month to month.

We discussed it - and we are going to cash it (the IRA) out in January. We both have great 401k's and stocks now. We're 30 years old.

Credit card debt is at about $14,500.

Questions - if I'm figuring this correctly, after the government takes their cut, and we pay taxes on it - we might see about $14,000. Is this correct?

I know it's a bad thing to do - but we both feel like it's the only option at this point.

Question - will the taxes be taken out right away - or would we just have to stash about $5500 to pay in on in 2009?

$22,000
- $2,200
- $5,500 (what determines this amount?)
$14,300


Thanks for your help.

[disneysteve]

How much do you have in your 401K plans? And when you say "stocks" do you mean in the retirement accounts or in non-retirement accounts? How much are you currently contributing to your 401Ks?

I would do anything you can to avoid cashing out the IRA. Cut back everything you possibly can. Temporarily stop contributing to the 401K. I'd probably even borrow from the 401K before cashing out the IRA.

Otherwise, your numbers are probably about right. I'm not sure if taxes are taken out right away. I'm sure the IRA folks can answer that for you.

[Betz2]

Thanks for the response.

The 'stocks' are non-retirement

We each contribute 5% to our current 401k's.

[jIM_Ohio]

I would look to cash out the stocks or take a 401k loan before cashing out the IRA.

There are fewer penalties for cashing out the stocks.

To answer your question, the IRA custodian is required to withhold 20% for taxes on any non qualified distrubution, I think. Check with IRA custodian on this.

Cashing out of anything does not change the behavior which caused the problem. I would look deeper for a longer term solution.

[disneysteve]

The 'stocks' are non-retirement

We each contribute 5% to our current 401k's.

So why not sell the stocks and temporarily decrease or stop the 401 contributions? $14,500 is a lot, but not terrible. Why lose $8,000 from your IRA and all the future growth of that money. You can't ever replace that money.

[kv968]

I would look to cash out the stocks or take a 401k loan before cashing out the IRA.

I agree with cashing out the individual stocks and not the IRA. Also temporarily halting the 401k contributions might be a good idea. However be careful when taking a loan against the 401k. If you or your lose the job or quit while the loan is still pending, they can make you pay the entire amount back in a certain amount of time (usually 60-90 days) or it will be considered an early withdrawl and will be subject to the appropriate penalties and taxes.

[snafu]

Hey! Life happens! Consider creating an 'emergency fund' to deal with unexpected expenses. Since you've made the decision to sell, there is no point in offering suggestions. It's important to realize that you can never replace the $22K + compound earnings that sum generates over 25 years?

Instead, you will voluntarily give GWB atleast $9 GRAnd and compound the error by using those after tax dollars to pay for old purchases. What will you cash out the next time you get in 'over-your-head'?

You seem unwilling to cut & slash all non basic expenditures to recover or doing something to generate more income like xtra hours, a 2nd PT job ? You'll likely 'want to give yourselves 'a really good Xmas' as a reward.

[Hot dog]

14,500 is not that much. Can you move it to a 0% card? Then work hard and pay it off. do you have children If not sacrifice a lot and also you could both get a second job.