Credit Cards and 401k

[angel2]

I just have a question about cashing out my 401k and I know normally people say to not do it, but I think my situation is unique. I have a 401k through my old employer that is only worth about $5k. It is actually making a negative return right now and has been for a while. I have a Roth IRA through an investment company and I am also contributing to a MERS pension plan through my new employer currently. I am contributing 5% of my income to the new pension plan and my employer is matching 8%.

I am only 23 years old, just recently got married and had a baby. We are looking to buy a house as soon my husband is able to find a teaching job, but we would like to pay off our debt first. Cashing out my 401k would pay off our current credit card debt and would allow us to start saving money. Right now we are living pay check to pay check because of my husband not having a job (only being able to substitute teach) and I am only working part time. I would hate to get behind on credit card payments and ruin my credit.

I don't think we would have to pay high taxes on cashing this out since we barely made anything this past year. Any suggestions????? I'm not sure how the 401k taxes and penalties work and I'm looking for any advice. I figure since I'm only 23 and have three retirement accounts set up, cashing out this small one that is getting me a negative return would be ok. Thanks in advance for the help

[ea1776]

The 401(k) will be taxed as ordinary income plus a 10% penalty. It is almost never a good idea to cash out the 401(k). Also, how did you get a negative return this year? The market has done excellent this year (S&P up like 27% or so).

If you post your specific budget and expenses, the others on this board will do an excellent job of helping you with specific advice.

[disneysteve]

If you cash out a $5,000 401k, you are going to lose about 35% to taxes and penalties, leaving you with about $3,200. Does it really make sense to throw away $1,800 for nothing?

I've also got to wonder how you have that money invested that is losing money this year.

[StevenXL]

Angel2, this is a very simply questio - Do Not Take The Money Out of Your 401(k).

1 - You will pay a huge penalty that others have already mentioned.

2 - If you take the money out, you might still fall behind on your payments when that money runs out. Which means you not only ruined your credit score, you paid a huge fee (in the form of taxes) to do so.

If you already have taken the money out (hopefully you haven't), you have 60 days to put it back in without incurring any fees. I'm only telling you this in case you have already taken money out. Don't expect to take money out and then pay it back before the 60 days. You won't be able to.

Hope this helps.

- Steven

[Snodog]

There's no way I'de take that money out. And there should be no reason you'd have a negative return this year as almost everything is up.

[jIM_Ohio]

the 401k making or losing money should not impact the decision to cash it out.

$5000 in 401k will put, maybe $3000 in your pocket after taxes and penalties.
If you have $5000 in roth and have made $5000 in deposits, that is a better place to tap into to pay down a debt.

I do not think you have provided enough information for us to really help you though...

1) How much debt do you have?
2) Is the debt a loan or on a credit card?
3) what is the interest rate(s) on each debt?
4) what is your current budget
a) total monthly expenses
b) total monthly income
c) difference between expenses and income?
5) Can you itemize each expense in the budget for us?
6) Can you outline the costs of houses you are looking at?
7) How much short term and long term savings do you have?

[wxman611]

I wouldn't do it. If you haven't heard of him, Dave Ramsey has some great financial advise. You can go onto his website or to any book store and buy "The Total Money Makeover". I read it and it has changed my life in many ways.

[Fern]

If a bad collection of mutual funds is behind the poor performance of your 401k, and the 401k is with a former employer, then why don't you roll it over into an IRA of your choice so that you have full control over how it's invested?

401k money is for retirement purposes and shouldn't be used for other purposes. You'll thank yourself at 60 for not touching it now. But do reinvest it in something that at least keeps up with the rest of the market. 2009 was a good year for stocks.