Near the end of my rope - seriously considering 401k WD

[sigamy]

Hello all. I'm new to the site. Let me start by saying my mind is almost made up on taking a WD from 401k to get my head above water. I've read plenty of blogs, articles and forum posts that say to never, ever take money from your 401k but I am almost at the end of my rope.

We purchased new home one year ago. Basically more house than we could/can afford but somehow we got the loan and now here I am. Very, very big mortgage and monthly payment. For the first year I've burned through all savings just to pay monthly bills.

I've done budgets time and again but we are so tight month to month and then simple things like life get in the way. We had some flooding in the basement. $5k to repair. Town came and "suggested" that I cut down dead tree in the front. That will be around $1500 easily.

We have two used cars, owe about $11k on each. $11k in CC debt. Two kids, with activities, clubs, etc.

We haven't really tighted the belt fully yet so there are areas I can save. Both wife and I have expensive cell phones. We have package deal on Verizon Fios. Funny how all these items become neccessities when you get used to them. I know I am a "lazy, fat American".

I also know that my wife and I are not going to change. We are not budget freaks and we are not disciplined. I can try to fool myself and you all but we will not stick to budget.

Don't get me wrong, we don't spend like crazy. No vacations in 2 years. No big purchases.

So...I have very little equity in house, only 1 year in and it may have dropped from $599 to $560 or so. I have about $115k in 401k. I want to take $50k of that to get to 80% LTV for a 30 year refi. It should drop mortgage by $800-$1000 per month. I really need that money in order to live. In order to not walk around like a ghost every day.

I'm worried about how we are going to pay for the house going forward. Savings is gone. And again, I know what you are going to say but there is no way we can give up the house. It would kill me and my wife.

To me, the 10% WD penalty and taxes are worth it for the peace of mind we will have and the ability to live better day to day.

So, how nuts am I?

[jpg7n16]

Probably really nuts we all are!

Other options:

1) Sell the home and move somewhere cheaper
2) Sell one or both of the cars, and temporarily downgrade to a 3-5k car
3) Post your budget, and get some help controlling your spending
4) Reduce 401k contributions to only the company match - use money to accelerate debt elimination
5) Try and refi at the current amount

This would solve a lot of your problems.


Also, you have fantisized the impact of your $50k. At 6.5% a $250k mortgage is $1580/month. If you paid down to 80% and saved 1%, it'd be at $200k @ 5.5% which would be $1136/month. A difference of $444. Not $800-1000.

---and for the priviledge of saving $450/month, you will pay taxes on $50k at your marginal rate plus incur a 10% penalty. (At 25% bracket, you're looking at a total cost of 50k * 35% = $17,500) Do you have $17,500 lying around to pay this tax? Then either you can't pay down all $50k, so you won't save as much each month - or you'll owe the IRS $17,500. 2 bad options.



How would you like to keep all your 401k, make a few changes in your spending habits, and get rid of all the stress just the same? Post your budget (income and expenses) - and we can help you get started.

You've gotta start somewhere, or you'll be in this same position 10 years from now. It'll take some practice, but you'll get there.


Think of it like running, or lifting weights. Say ultimately, you want to run a marathon - so do you start by running 26.2 miles on day 1? Of course not! You jog around the block. You start small and gradually build up over time.

Where are you starting at? (I jog between 0-1 miles a week)
Where would you like to be? (I would like to jog 26.2 miles straight)
What gradual changes can you make to get you there? (Start with jogging 1/2 mile a day for a week or two, then 1 mile, then 2, 3, 5, 10, etc.)

Think of budgeting the same way:

Where are you starting? (This is my current income, and these are my current expenses)
Where would you like to be? (I would like to have a positive cashflow each month of $750-1000)
What gradual steps can you make to get you there? -- this is where we come in

[MonkeyMama]

Well, how crazy this idea is somewhat depends how old you are.

That said, you don't want to do anything to fix the problem, except deplete your retirement savings. I am not clear how this really helps you.

"I really need that money in order to live. In order to not walk around like a ghost every day." You are so focused on today, you haven't thought much about how to avoid the same problems in the future.

I am presuming you need $50k, which means you need about $90k of your 401k before penalties and tax. I would be surprised if $50k would net you much after all that. I also agree with jpg... REducing your mortgage by $1k per month with $50k? How???

[jpg7n16]

I am presuming you need $50k, which means you need about $90k of your 401k before penalties and tax.

To get an after tax $50k:

At the 25% bracket w/ 10% penalty, OP would need to withdraw: $76,923
At 30% bracket would need: $83,333

The 50-83k withdrawal would take the OP out of the 15% bracket by itself.

Terrible idea.

[ferriwinkle]

Also, if you take a loan against your 401k, you would still have to make the payments (back to yourself), so that would decrease any savings you might get.
have you thought of renting out rooms in your house. We rent a room to one of my coworkers (temporary, but still extra income).
Any "things" you have that you don't use or need, sell and apply to debt.
get a second job, get a paper route.
Try to decrease your bills, and increase your income--any way you can.
taking from your future income to pay for today's mistakes is a bad habit to get into, you will regret it. Trust me, i know. about 8 years ago I withdrew all of my retirement savings (about $45k---at 23 years old) to pay off consumer debt. That was not a good idea, I had to pay taxes and penalties, and i still regret to this day that i nuked my retirement when I started off so well. I am now 31 and only have about $6k saved for retirement and am again trying to climb out of debt. i own a house, like you, and have car payment, but cashing out my retirement didn't seem to help me any, it only made matters worse.
i hope this helps.
listen to others on this site, they are a great resource and have great advice.

[sigamy]

Thanks for the replies. As with how I do most of my budgeting, I guess I've tended to round up or round down where it benefited me

The $800 - $1000 in savings would come from my assumption of rate going from 5.5% to 4.5% and the elimination of about $240 in mortgage insurance payments.

I'm really kicking myself that I didn't beg, borrow and steal to put 20% down on the house in order to eliminate the MIP. I am an adult and should have known better but I am also PO'ed that no one helped me in this regard--mortgage, realtor, lawyer, no one offered advice on this area.

I really like the down grading car idea. I will look into that.

Here are some more specifics.

Current loan
30 year FHA jumbo @ 5.5%
sale price: $599,000
down: 10% $59,900
loan amt: 539,100

payment including taxes, insurance and MIP: $4167 per month.


Calc I ran this AM:

value: $599,000 (could be wishful thinking)
20%: 119,800
owe: 535,000
equity: 64,000
add equity req: $55,800 (up from 50k and yes, would need to take much more out of 401k)
loan amount: $479,200
payment including interst, taxes and insurance: $3302
monthly savings of $865

[Cassius King]

Sell the house! Unless you or your wife are expecting a major spike in income, it'll be a drag on everything you'll ever want/need to do.

What's the age of you, your spouse, and kids?

[Fizgig]

This could be a moot point, because it's not a guarantee that you could even get a refinance. Lenders are extremely strict with terms these days, and since you openly admit that you bought too much house, you may not fall within their debt to income ratio rules.

If you do get a loan, the refinancing costs are 3-6% of the balance. That's a minimum of $16k, and you'd have to withdraw another $25k to cover it after taxes and fees. Now you're talking about completely depleting your 401k to stay in a house that you admit you cannot afford. So. Does that sound wise to you?

New loans will not help you. A hugely expensive refinance will not help you. You need to cut expenses and deal honestly with the income that you have.

And no, it will not kill you to sell the house. There's a house on every corner.

[jpg7n16]

I'm really kicking myself that I didn't beg, borrow and steal to put 20% down on the house in order to eliminate the MIP. I am an adult and should have known better but I am also PO'ed that no one helped me in this regard--mortgage, realtor, lawyer, no one offered advice on this area.

I really like the down grading car idea. I will look into that.

After seeing the numbers, you should be kicking yourself that you bought the house in the 1st place. Sell the house. Rent somewhere for $1500-2000/month. Take the equity from the sale and pay off all your debt. Keep the cars. Start budgeting.

If you didn't have the house, you could afford the cars. If you didn't have the house, you wouldn't be strapped for cash. If you didn't have the house, you could keep funding your 401k.


The house is causing 99% of your problems.

[littleroc02us]

Your dreaming if you think it will be only 10% taxes on withdrawing 50k. It's more like 40%. I did this too when I was in my early twenties thinking it was a good idea and they took out almost half, 20% initially and then another 20% at tax filing time. May I suggest a couple of things. First of all it sounds like you and your wife are living the Jones' lifestyle and are in denial that you cannot continue. If the both of you don't decide together that you need to (I'm sorry) but grow up and take financial responsibility for your children and your lives, you will play this game forever. I mean, what happens when you deplete your 401k and then it's not enough, what are you going to do next. Life style change is the only way.

1. House has to go. See if you can sell it for as much as you can get. Take a loan out to cover the difference.

2. Sell the cars and take a loan out to cover the difference. Buy cheap used cars.

3. Explain to the kids what the situation is and they will have to cut back on activities.

* If you continue to live in denial, then good luck because it doesn't work. Believe me, I've been there.

[sigamy]

Again, thanks for the replies. I am reading and re-reading these posts.

littleroc, I said "the 10% WD penalty and taxes". I didn't mean 10% total. My understanding is there is a 10% penalty off the top and then the withdrawl is taxed at your tax rate.

To everyone saying "the house must go"...I have a hypotetical for you. Would you give the same advice if I inherited $90k-$100k? I'm thinking that is the amount I need to either fund a ReFi to eliminate MIP and improve rate, or to pay off other debt and refund savings. I know you probably don't like hypotethicals (and I'm probably again not facing the reality of situation) but I'm curious.

[littleroc02us]

littleroc, I said "the 10% WD penalty and taxes". I didn't mean 10% total. My understanding is there is a 10% penalty off the top and then the withdrawl is taxed at your tax rate.

Believe me it sucks to have saved all that money and then the Gov't taxes it around 35-40%. Don't do it. Find another way.

[littleroc02us]

To everyone saying "the house must go"...I have a hypotetical for you. Would you give the same advice if I inherited $90k-$100k? I'm thinking that is the amount I need to either fund a ReFi to eliminate MIP and improve rate, or to pay off other debt and refund savings. I know you probably don't like hypotethicals (and I'm probably again not facing the reality of situation) but I'm curious.

Again, I strongly believe only from the facts that I have read about your situation is that your living in denial and trying to save all that you have. When you don't have all this debt and a huge mortgage you will be able to breath easier. Just think for a moment, "what would I do differently if I had more disposable income and live more within my means?"

[NJDebbie]

You are bound to walk like a ghost for a lifetime if you do not change your attitude about money. Have you stop to think what would happen of if you lost your job or a serious illness? Your priorities in life should be to protect your family and you are sacrificing all that just to keep a home you cannot afford.

[LuxLiving]

Original poster, please explain "You NEED that money not to live like a ghost" I guess I'm unfamiliar with the phrasing? Aren't you alive and typing this now, pale and sweaty and stressed when each new bill comes in the mailbox? Are you saying that folks who live within their means are 'living like ghosts?' Sorry, I just don't get what you're saying. Explain it to the slow girl.

Here's how I understand the hiearchy of human needs...something like, food, water, shelter & human compassion, not necessarily in that order. You don't NEED an overpriced house. You WANTED one.