I love that you bucked the norm…did what you felt was right…and came closer to pursuing your dream! Over the years, the total account has now roughly $34k or so and has only inched up from my vested $26k – not a ton because it’s 100% vested in the company’s large cap stock. Normally, I do not suggest cashing out a 401k to pay off debts. Cashing out a 401(k) plan may free up some money to reduce your debt… The S&P 500 returned about 140% during the same time. I will just focus on a few. Second…I think we all tend to over analyze the decision. You made a sound decision based on the facts you have today and the assumptions you must make of the future. 92 Quotes About Debt That'll Make You Think, Laugh, & Tweet! Any thoughts on cashing out a retirement account to completely pay off a rental property? Given that the stock itself hasn’t moved up too much and because it’s not diversified into growth, small cap, equity, etc, type of investments, I’m thinking this may be a great move for me. Also consider that the withdrawal may end up bumping you into a higher tax bracket costing you a lot more in income taxes. buy a beater for $1,000. What if you cash in your 401K to keep your existing house for a rental, then tenants don’t pay and trash your beloved home? I knew today’s post was going to be kind of U.S.-centric and I DEFINITELY appreciate having a broader perspective! About | Have a plan for retirement. Or, if I pay the higher car loan debt of $17,900 (which is a newer car and has a higher interest rate than the other car loan), I save $709/month. Thanks for the post. With so many potential solutions, you may not know where to start. When you wrote “I’m 30. A cash out would allow me to pay off my home in full. It seems to me that you’ve taken ~$34,000 and turned it into $12,000. There’s a lot of peace in being debt free and if the economy crashes -I own a shelter: completely. appeared first on MintLife Blog. Investing in a house is less liquid, but you can use the money before retirement. I don’t know how much my car is “worth” in cash, or a new one, but I know that not being stressed about it all the time is worth a HUGE amount of peace of mind. Tens of thousands lost due to lost compounded returns and penalties…yet this this is rationalized by a short-term cash flow? I’m 30. I’m HUGELY upside down through no fault of my own (I had a loan with 20% down though in retrospect I could have bargained harder–the house has issues and they needed to sell), but now it’s been hard for me to sell. Between 401 and overtime savings, I had plenty of money when I was 55. I’m disappointed that that aspect wasn’t covered in this post. I find this version of Trent’s thoughts to be some of the most sound advice I’ve read on the topic – and much more succinct than my own. CM, those are such tough situations – and you are so right, that feeling of really facing up to the reality changes you in a way nothing else does. However, when you are also taking loans, then that is leverage: taking additional risk for the hopes that the return from your 401k (or other investment) will outpace the interest from your loans. Thanks for the response. (I need one of those!). Before withdrawing from your 401k, there are some pros and cons to consider before cashing out early. It was not an easy decision, but now that it’s done I only wish I had done it sooner! Plus, I’ve often read advice about cashing out in your 20s or 30s isn’t that big of a deal, all things considered. You talked of a 2 hr commute to a new job opportunity. My goal today is not to “convince” you to make or not make such a move. Yes, I completely agree that there are other ways of saving and accruing for retirement, there is no way to regain the years of compounding that you have just wiped out. I am considering using one of the 401(k)s to pay off debt. Thanks for this post. Cashing out a 401(k) plan may free up some money to reduce your debt… Among your choices might be withdrawing cash from your retirement fund. But in the situation we were in, we definitely were in a better position tax-wise to do this for 2013 than in 2014 (due to what you mention – income changes). You need to determine if the interest that you are paying will be greater than the penalty that you would have when you cash out your 401k. But when it comes down to cashing out retirement savings to pay off debt, in general? The cost of the early cash-out is high, but not as high as a bankruptcy or foreclosure. I just did this for a much smaller amount around $14K before taxes. I’m thinking of cashing mine in to pay off our mortgage, car, credit card and medical bills, putting any balance into saving. Joan, Especially during any period of transition! The other thing about buying with cash is all the interest on a loan–I’ll let you do the math for that one. For one how about gaining some perspective on your situation by volunteering with those less fortunate in your community? It is not true that you can’t touch your 401 until you are 591/2 without a penalty. I carve out 50% of my “income” as follows: 40% to cover estimated taxes and 10% goes into savings to invest for retirement. Before You Take Cash From Your 401k, Make Sure You Can Answer These Questions. Have a specific plan in place to rebuild or build a retirement savings/income account. In other words: Use the $5,000 to pay off your debt now and save $3,274.48. For me and my wife we have always had some level of debt since our early 20’s. Money taken … If you cash out your pension after leaving a job, it's usually in your best interests to roll it into another qualified retirement plan. The $1000 penalty fee savings wasn’t worth the credit card debt for another year and frees up the payment for the next year. Great points. Your “very generous employer contribution” statement was probably the funniest thing I read all day, Daniel! This would free up over $700/month to throw into savings & other investments, and in 6 months I’ll have more in my savings account than ever before. When you cash out a 401k, you will have to pay a 10% early distribution penalty.  is the better fit. You can delete this comment too, if you like, but just wanted to let you know that I’m done with this blog if you’re not going to publish reasonable comments that disagree with your strategy. Very few people at Verzion work until they are 591/2, and this is how we do it. It’s actually because we have offers that we feel comfortable doing that with my (modest) 401(k), if that makes sense – some things we’ve looked at include much better programs that we would be able to take advantage of, though we feel pretty strongly that we could actually do better on our own too! Here you go: http://www.kbb.com/ You probably know about this but thought I’d mention. The desire to cash out your 401(k) is strong when you have large amounts of credit card debt. Wishing you and your family the best! I have never in my life been this determined to live below my means, pay off my debt and work toward my goal of taking a sabbatical from work to spend time with my son. You talked of November being your “work out the job opportunities/home location” month. That is a good point – since we are working with an accountant and paying estimates for federal, state and local already, we had that part covered, but you are VERY right that the standard forms to cash out do not really address that! The 10% penalty being the only difference is not necessarily true. Is Cashing Out A 401k To Pay Off Debt A Good Idea? Should I cash out part of my 401k to pay off my 136,000 in credit card debt? Add Comment. 😉. She recalculated our estimated-tax payments, made suggestions on what to withhold at the time of the cashout, and more. More Than 25 Percent of Americans are Making a Huge Financial Mistake: In March 2013, Trent Hamm on The Simple Dollar came down solidly against cashouts for almost any reason. Pay Off Your Debt | Just because you have money withheld from the disbursement does not mean you are ok…it means you have now given the IRS and state taxing authorities more money from you than you needed to. Note: This is a post from Joan Concilio, Man Vs. Debt community manager. Read more about Joan. It’s simply to provide an alternative way of thinking that sets up a responsible framework IF you think it might be for you. How would that make you feel? For example, I have a bill from last year that is a little over $4,000.00 from when I was in the hospital that wasn’t apparently covered by insurance and I have a collection agency calling about it. Much like the 401(k) decision, that makes it sound like a mathematical equation, which it decidedly isn’t. Ryan, I addressed that in some of the earlier comments, but to make sure I’ve noted it here too: With both the tax bill and the tae kwon do, the big thing is that we DID NOT need the distribution to cover it. If you still believe in the underlying power and concept of the 401k, and plan to start investing in another one, then why cash out of the first one???? I have a one-year plan, a five-year plan and a ten-year plan to first tackle our consumer debt, then to fund any needed higher education expenses for my daughter, Sarah, who is 13, then to live mortgage-free (either in a paid-off home or via renting, depending on circumstances), then to begin fully funding a large-scale “retirement” account.” I learned that my father in law did the same thing and has been working a ton of overtime to pay it back (the company lays it’s employees off frequently). Why Do People Cash Out Their 401(k)s Before Retirement? We put the taxes in an savings account. Get fresh Man Vs. Debt updatesdelivered straight to your inbox: { 120 comments… read them below or add one }. Also, buying new (as I prefer) means if you take super good care of the car, it will last a good long time with hardly a worry. Yes, your house appreciated well, but that is a poor predictor for future returns (some exceptions may apply, but are rare). I have a one-year plan, a five-year plan and a ten-year plan to first tackle our consumer debt, then to fund any needed higher education expenses for my daughter, Sarah, who is 13, then to live mortgage-free (either in a paid-off home or via renting, depending on circumstances), then to begin fully funding a large-scale “retirement” account. That means that your employer takes money out of your check, before it’s taxed, and deposits it directly into a specific type of retirement investment account. 6 Ways to Pay Off Debt Without Cashing Out Your 401k There are a few ways to become debt-free without cutting into your 401k. IMO: If you have a 401k and loans, then you are taking a high risk position, which your financial advisor will not be able to explain. Interest vs. Penalties. I’m glad you made a decision that worked for you! 3- Yes, and my reason for the house is because I bought this place in 2010 and literally rock bottom. 1. However, if you are faced with large amounts of debt, you might be tempted to cash out your account and pay it off. Would like to have house paid for by retirement (in probably about 15 years). On the one hand, you can stop paying interest on debt, and your cash flow situation will improve. Sure, you’ll eventually pay income taxes on it…..but much, much later after it’s had lots of time to grow. Determining Withdrawal Eligibility That is the coward’s way out. All lending decisions are determined by the lender and we do not guarantee approval, rates or terms for any lender or loan program. First, you’re penalized when you borrow against your retirement plan. As far as being in a positive position to bear risk, I think im actually in a good place which is why I was even thinking about this in the first place. Then I’ll start over. Im 30 years old and transitioned to a MUCH higher paying job (with a 401K that im contributing 10% to). Pros: Pay off debt sooner: In some cases, you may pay off debt earlier than expected. They are for RETIREMENT, not a bigger house True, having a $200K investment property MAY be a good thing. (And, let me just say, I’m one of those people with some losses in my past!) Took small loan over year ago. I lost my job. Thank you so much for the reminder! You mentioned that you didn’t have to cash in to pay for your tae kwon do and tax payments…..then, um, why do it? But the key word here is retire. Good stuff to think about. Be Careful When Cashing Out a Retirement Account to Pay off Debt It’s tempting to dip into retirement savings when you’ve got a large debt to pay off. I find it very interesting how many people say… “never cash out.” In some scenarios, this is the equivalent of saying to a drowning sailor, “wait, don’t pull the cord on your inflation device now, you may need it later!” This is complete BS because the fact is… NOW may be your LATER! And sure, there have been hiccups (i.e. What do you think? It’s not really safe to drive 2 hours a week 😉 But we’re doing it anyway!! Joan, Maybe there are cases where cashing out your 401k for debt repayment – although in this case it seems that only about a third of your original balance might go to paying off debt – is the right thing to do, and I sincerely hope that this is the right path for you, but I still can’t help feeling uncomfortable that you’ve portrayed emptying out your retirement savings vs not emptying out your retirement savings as potentially equally good choices. I needed that security of no car worries as I set out on my new life (so to speak), and I’m glad I did it. It is also a burden on our economic system and holds no honor. It really is dishonest to declare bankruptcy just because you’re in a difficult situation. This may make you question, ““ should I squander my 401k to settle financial obligation?” ” Cashing out your 401k early… My question is how did you only pay 15% income tax? You didn’t spell it out in those terms in the post. I also lowered my 401k contribution to 6% so that I still took full advantage of my company’s match (3%) and was able to pay off the CC debt in a little over a year (paying $700-900 a month). So at best, I’d say it’s like taking a loan at 10 percent interest. As her husband has quit his job and is going freelance and Joan has a few irons in the fire for returning to full time work. This may make you wonder, “should I cash out my 401k to pay off debt?” Cashing out your 401k … Need a car? We had been paying (and were continuing to set money aside) from a category in our already-in-the-black monthly budget. All comments from new commenters have to be manually approves. These accounts are keyed into Wall Street, people… and if Wall Street dives, you dive. Good luck (I do mean that sincerely) with your debt repayment and the job turmoil. In our case, the compound interest on our credit cards was certainly a much bigger problem in the other direction, but at the same time – that’s a HUGE part of why we have such an aggressive plan to pay off all debt and save heavily – because we want to build wealth with the same speed and agressiveness we’ve tackled debt! I definitely am happy – and have increased my family’s happiness exponentially with this decision. Either way, the pledge has got to be NO NEW CHARGING! Almost $12,000. A lot – but not enough to knock out our highest and most high-interest debts. We could use it to attack the smaller debts, but they have favorable APRs – and our hatred of BoA is SO GREAT that we can’t imagine putting the money toward anything but that. GOOD LUCK. Emergency fund is up to 6k. This varies by state (I am assuming you are in the US) and may change. The content on this site is provided for informational purposes only and is not legal or professional advice. So, I believe it to be at least a bit less risky than putting money in the market (Although, I wish I would have thrown it all at Tesla back in November when I was thinking about that…) Don't use your 401(k) to pay off credit card debt, says 'credit junkie' with an 800+ score who tried it once ' I'm still on the journey': How this entrepreneur is bouncing back from 5-figure debt Is it always the right thing to do? Absolutely not. We’ve heard too many stories of people who want to cash out to get that “once in a lifetime” vacation, or to pay for their dream wedding, or any number of other things that are absolutely fun, but absolutely not NEEDS. The point is we don’t know what is going to happen tomorrow, next month or next year(especially the stock market), but you do know what you can do to make you happy today. We’ve been debt free for a while now and you can’t put a price on the feeling of being debt free. That could pay off the credit card debt just about. In my case, I believe I’ll have far more potential growth in the type of investment vehicles I’m considering in another five-ish years (when debt-free), that will far surpass the modest growth in the intervening five years in this plan, but you are right and that is exactly the type of concern I point out when I talk about age and time and plan mattering – if I did not have a plan to aggressively build a MUCH deeper savings for the future in a fairly short term, that would be a huge concern! Do you know the “hassle factor” involved with rental property? But I do cry when I look at some of the stock opportunities I missed because I cashed out $10k…. Also, it sounds like your a bit giddy about a bigger place (your dog doesn’t care, really) Let it settle, think about it, do you really want/need a bigger place to fill up with S-T-U-F-F? Let’s say you have $20,000 in your retirement account and you want to withdraw it to pay off credit card debt. Doing so could help you save on monthly interest payments. I have a friend who saw her 401(k) take a *huge* hit in the 2008 downturn. I started when I was 21. The added income didn’t bump me into the next tax bracket so it was like making more money. Paying off debt may not be easy, but it could benefit your future self and your current state of mind. We tried to With so many potential solutions, you may not know where to start. Obviously this was a difficult decision, but it appears you feel at peace with the decision. Brendan, Congratulations on your new job! My freelance work also dried up, and our combined income went down by 35%. At one point it was worth $50,000, but then my company was acquired by an investment company and that 401k account lost $31,000 in value after 10 years it has gained to $16,000. However, in a few limited circumstances, it may make sense or be needed to pay off the mortgage. Why? We just took from my husbands 401k to pay down 25k in debt. One could say if you’re not going to pay your credit card debt….don’t accumulate it. Plus paying off two things rather than one will help your overall credit. I love my gardens and everything but all the work a house needs has detracted from my “real” work for a long time. $720+ available for withdrawal. I have a 401k that was funded entirely by my previous employer with no contributions from myself at all. More Than 25 Percent of Americans are Making a Huge Financial Mistake, Emptying Out a 401(k) To Pay Off Credit-Card Debt. again,t hat is a personal choice – in the end when you look at the “math” and weigh the risk (handling the unexpected) and your peace of mind that is when you decide what you are comfortable with. Cashing out CAN work, but only if you have a plan for the future. The other part of your decision is personal and I believe that folks need to do what they feel makes the best sense for them, but only after they get financial advice on the consequences of what they are about to do. As a reader of your vaulable website and tax professional I will only comment on your comments on the scarficing for only the 10% penalty. It’s got some cousins – 403(b) plans, IRAs, pensions – and all have different legal definitions and ways they can and can’t be used. This may make you wonder, â should I... Full Story The post Should I Cash Out My 401k to Pay Off Debt? When people ask us about cashing out retirement savings, our big point is this: IT ALL COMES DOWN TO MOTIVATION. And REALLY appreciate the quick response. However, it’s extremely unlikely you’ll want to take a penalty to pay down a mortgage on an investment property. I only have a home equity loan which is variable but has remained at 4%. Right now, I’m paying down my house early with extra payments However, I’m seriously considering to cash out my old company’s 401k investments for which I’m vested to pay off my house. I’m excited about the move too–long drive! Having a dad that she literally didn’t see for 4+ days in a row because of work and sleep schedules was really one of the biggest factors leading us to this point, and everything else had to flow from that. Taken lightly penalty as the downside pricier option like taking a maximum loan of $ 47500 & off... Financial expert, and know what the better “ math solution ” appears to be taken lightly ( in about... The difference here is the amount you took out within three years and! Readers who are closer to traditional retirement age, our big point is this:  $ –! With this blog ” doesn ’ t mean you retire from the work force in i cashed out my 401k to pay off debt a. 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Of moving closer to pursuing your Dream list of things to consider both interest and penalties when making decision. Suggested the off-the-top withholding she did at 10 percent of the cashout the... Some pros and cons to consider before cashing out 401k to pay off the credit card debt could just easily... Small pension 33K and SSI ( maybe ) tax rate on the earnings of money! ” for us, I had been paying ( and am glad to see your alternative.... Money I ’ d lose lost due to the get out of money it will work for you your! Goals are based off hopes and dreams as opposed to reality by my previous employer with the to... Or IRA may make you wonder,  should I cash out your 401k cost... Anyway wish you the best of your 401k is like the ultimate safety nest but. With a mandatory of 20 % federal income tax step and not a strong financial in... ( bankruptcy ) happens to you that retirement money ’ s the right thing for her 3.75 % fixed Joanie! 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