I am currently unemployed and I am going back to school for another degree. It will take me several years because my previous degree had nothing to do with this new chosen field, so I have to take pre-requisites before going into the university. I am fine with it, time passes quickly! In the meantime, I have to cut down on expenses because all I will be doing is my real estate (which is really slow) and go to school. My DH does not make very much money & we are in debt due to credit card bills. I have enough in my 401k (20k) that will cover paying for all my CC debt which represents $500 a month. I heard from a friend, who is an accountant, that due to the economy many people are tapping into their 401's. Once I finish school I will be making good money so I know I will have that & more.
Has anyone tapped into their 401? I know you pay 10% penalty & then have to pay taxes on it. I have to cut down monthly expenses some how!
What are you guys doing?
I've had many close friends do this several years ago in the previous recession and they admit it was not worth cashing it out. Even though they were in the most dire of circumstances. A lot more is taken out than you expect and then you get hit with more to pay when it's time for taxes next year. I think the biggest chunk is withheld up-front. Depending on what your tax bracket was/is for the year, up to 20%+ of it's value will evaporate before you get the cash. I think the employer has to withhold some of it first and then the 10% comes later. I'm not sure, check the IRS site.
It's hard to give advice about this especially not knowing the whole story and all the variables involved. But if you need the money and there's no other alternative, then you need the money.
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What do you think the 70-year old version of yourself would recommend?
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Don't do it... It'll be wasting your hard earned money you've worked for all your life.
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Setting aside for a moment that I'd like to see federal law ban people from touching their 401k's until retirement, you need to know what your household marginal tax rate is, because the amount of money you lose is 10% penalty + marginal rate%. SO if you're in the 25% marginal rate, that's 35% lost from the get-go. If you live in a state with state income taxes, well that's why for many people accessing the 401k causes them to lose nearly half that money after taxes -- which is just much too high a price to pay.
OTOH it sounds like you don't have high income, so maybe you are in a lower tax bracket. Perhaps you are among the half of households that do not pay income tax and your marginal rate is zero.
Nevertheless to put it mildly, I'd consider that the very last and worst option. For example, "not going back to school" is probably a better option. Taking student loans is better. Defaulting on your credit cards as a way to reduce expenses instead is very possibly a better option -- in the unlikely event the credit card company sues you, they can't touch your 401k!
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Let's say that the OP has an AGI of between $16,700 and $67,900 and married filing jointly. That is the 15% tax bracket. Add on the penalty and it's 25%. Is it worth it to the OP to take $20,000 of her own money and burn $5,000 of it? Only she can decide if times are that hard.
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That $5K loss equals 2.7 years interest on $10K CC debt at 18%. If OP can't pay the cards off in 2.7 years (or less if the rate is over 18%) preserving the 401K could be the more costly route. I"m assuming the 401k is earning a negligible return right now.
If the cards get charged up again after paying them off with the proceeds, all bets are off. That'd be the worst possible outcome.
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Post a list of where it's going every month and we'll offer some ideas on where to start chopping-
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I've had to do it before. Sometimes you have to do what you have to do to live.
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Thanks for your replies. I am in the 15% tax bracket, this year my household income should be very low since I will not be working & DH unfortunately does not make much. I was the bread winner but times have changed. If I don't pay the CC off w/my 401k I dont see them being paid off anytime soon & interest rates are getting higher by the day. I don't want to miss any payments and be in default because I dont want to mess up my credit. We had a storage space which we emptied out this weekend so that will save us $80 a month, the cards will save us about $500 a month. What we have left is as follows:
Life insurance $100 for both
Car Insurance $139 a month 2cars
Mortgage $1400 + maintenance $400 (largest expense)
light bill - $100
dish network, internet, & land line $80 (total package includes hd channels thru our bldg.)
Extra parking space $142
Land loan $266
Food $300-350
We have two investment properties which pay for themselves.
There is not much to cut from, we do enjoy going out for dinner & drinks but that has been cut. I cut my DH's hair, I am extending my salon appointments from three wks to five wks which is $45 and wearing hats! I will try to get grants for school for now & then when I get into the university I will get financial aid. I know the way for me is school, I do real estate but I don't want to be in the up & down cycle & I dont want to be making $10 an hr at jobs that I do not enjoy.
Once I get my degree I know I can start a retirement account, I am 45yrs old but young at heart. I wish I would have gone back to school 5yrs ago by now I would be finished, this is what I dont want to be saying 5yrs from now.....It's never too late to better yourself.
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Those two comments pretty much tell the story for me. You are going to lose more in interest than the retirement account contains in exchange for the "privilege" of working a low-paying job for eternity just to make the minimum payments.
Sometimes you have to invest in yourself and enjoy the payoff down the road. If you decide to do this, make sure the cards don't get charged up again- you don't get a second shot at wiping them out....
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I hope you're getting a degree in something lucrative.
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I'm with Kevin on this one.
You are 45 yeas old and will have, in essence, nothing in retirement. No way you should do this.
An education is fine, but you will probably accrue school loans there, too. This just has disaster written all over it. Get a part time job or something to pay the cards off.
If this was a medical emergency, then yeah, maybe cash out, but other than that......don't do it.
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I am 45 years old and no way would I cash in my 401k to pay off credit card debt.
By the time a person were to get out of school in 5 years, they will be 50 and how many more years are you going to work full time (and that's after you get hired somewhere) ..
to recoup the time and money you spent in school and the retirement account that is now .. GONE.
If you were 20, 25 or even 30 I would say "go for it".. but 45 .. hmm
Well. I wouldn't do it, but that's just me. Not to pay off credit card debt.
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+10000
retirement accounts (with the exception of principle in non-deductible IRAs) should rarely if ever be touched and IMHO not for the reasons given here; especially while will having cable, a second property, etc. I'd let my house go before I cashing in retirement accounts.
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It's a true statement but please only do this as a last resort, after everything else you've tried hasn't worked out and you need to put food on the table for your kids.
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Thanks guys, I did the numbers with a calculator I found online. It calculated for me how much it will grow within the next 20yrs without me putting anything else in & it was a good chunk! I will go over all my paperwork, bills & investments to see what plan I can come up with. I also realized that instead of leaving it in the 401k it would be better to roll it over to a Roth. I will try my best not to touch it. Thanks again.
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8 years AFTER cashing in my 401k's a little at a time to help during a divorce, and I am paying the IRS back at over $600 a month (however that was just reduced to $400 a month for good behavior). Very ugly... sounded like the 'only' way out at the time, but now - not so much.
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Setting aside for a moment that I'd like to see federal law ban people from touching their 401k's until retirement, you need to know what your household marginal tax rate is, because the amount of money you lose is 10% penalty + marginal rate%. SO if you're in the 25% marginal rate, that's 35% lost from the get-go. If you live in a state with state income taxes, well that's why for many people accessing the 401k causes them to lose nearly half that money after taxes -- which is just much too high a price to pay.
OTOH it sounds like you don't have high income, so maybe you are in a lower tax bracket. Perhaps you are among the half of households that do not pay income tax and your marginal rate is zero.
Nevertheless to put it mildly, I'd consider that the very last and worst option. For example, "not going back to school" is probably a better option. Taking student loans is better. Defaulting on your credit cards as a way to reduce expenses instead is very possibly a better option -- in the unlikely event the credit card company sues you, they can't touch your 401k!
I wouldn't do it....
Besides the above, you also lose
- the benefit of tax deferred compound interest growth and
- if you contributed to your 401k and bought stocks at any point before 2009, you're probably anywhere between 10% and 40% underwater, so you'll be taking a big hit by not waiting for the mkts to recover.
Look at current NAVs compared to average cost, then factor in the tax hit, my bet you'll be more than 50% out your original contributions by the time you get the check.
If you absolutely have to take the money out and have a feasible way of repaying it , maybe consider a 401k loan but if you're going to be in school for the next few years you will probably not repay it
Is there any fin aid available at your school? Is a part-time job outside your field feasible while you're in school?
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If she's unemployed, she can't take out a 401K loan. You can only take out a loan against a 401K while you are still employed by that company.
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If she's unemployed, she can't take out a 401K loan. You can only take out a loan against a 401K while you are still employed by that company.
sorry, I forgot, good point!
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The reality of the situation is you are going to need to work while going to school, or at the very least, hubby will have to get a higher paying or second job.
You have no income, hubby's income is low and your investment properties are not bringing in substantial income. So assuming you cash in your 401k (which I believe is a very bad idea for many of the reasons already discussed) to pay off your current credit card debts, you'll still need to pay for current and future expenses.
Best of luck to you.
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You have investment properties, so what you could do is incorporate them (LLC etc) Create a solo 401k. Roll your 401k over to the solo 401 (k). Doing this would allow you to take a loan from the 401(k) instead withdrawing.. therefore avoiding paying taxes.
You have the pay the loan back like with any 401 (k).. so you would need to come up with a plan to address that (part-time job.. etc).
I think this would be a better option then an 401(k) withdrawal.
I certainly don't think all 401k's loans are evil.. I think they can be very beneficial if they improve your position by allowing you to create other assets. I also think every situation should be evaluated on a case by case basis. Too many folks focus on the cons but don't see the pros's. There are pro's and con's in everything.
I would rather see you roll it over and use the loan option as an in case of emergency break glass fund in this case while you are in school. I am working and going to school myself.. but if I know that I can go through the school for employment opportunities.. hopefully you are exploring this also.
Not sure about where you are, but UPS is hiring in my area.. they offer shifts of 5 hours a day M-F and up to 3000 a year tuition reimbursement. I would check them out in your area if it feasible. If you can avoid taking some loans and getting paid as well to cover some bills..thats a win-win situation.
What would I do? Incorporate as I mentioned above.. roll the 401(k) over to a solo IRA. Take a loan from your 401(k) that will pay off one of your cc bills. Then use the cash flow to start the debt process on the next bill.
This way you leave most of the 401(k) in tact.. The payment should hopefully be minimal on the loan, and you have accelerated the debt process by using the extra cash on your next bill, and you still have most of the funds in tact...in case of a real emergency. As you pay off each debt.. set a small portion aside to serve as an mini EF, then use the rest for snowball.
Whatever you decide. I wish you the best of luck in school!