Thinking Of Withdrawing From My 401k.

So, I want to get out of debt and NOW!

I've been paying almost everything I have into my debt and it's going down but not fast enough. So, I live paycheck to paycheck since I'm overpaying on my payments. I looked and I have $5,000 in my 401k which I've never intentionally put money into. I found out that my company has been putting money from my paycheck into it over the pas 2 1/2 years and they also do 100% matching.

So, if I withdraw that I take a 30% hit which leaves me with $3,500. This would pay off my Stealth and the rest, paired with my regular payment, would drop my credit card down to $1,200. That only leaves me with a personal loan and a student loan.

This is pretty tempting to me as once the credit card is payed off I would take that $500 and month and put it with the $400 a month I would be paying on the personal loan meaning I could pay it off in a matter of months. I'm 29 and I have time to get that money back into my 401k after I'm out of debt as I can afford to pay extra into it.

I guess the question is, if you were in my shoes, what would you do?

Probably not, the only reason I would consider cashing out:

1) It's an emergency.
2) It's time to retire.
3) I got a month to live and I'm blowing my savings.

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Originally Posted by 3000GTCSULB

Probably not, the only reason I would consider cashing out:

1) It's an emergency.
2) It's time to retire.
3) I got a month to live and I'm blowing my savings.

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I agree. I have a similar situation, and no way I'm touching my 401K to make life easier on myself.

Look into taking a loan from your 401k. Many plans let you borrow against your account, which you will have to repay, however any interest on the loan goes to your 401 so that you're basically paying interest to yourself instead of to the CC company. Clear your loans, stop paying high interest on personal loans, use the extra money to pay back the 401. What's not to love?

I took a loan from my TSP (pretty much a 401k for govt employees) to buy my vr-4, it was a 2.25% 4 yr 10000 dollar loan, its 102 dollars out of every paycheck. Its getting paid back, I have 30+ years of growth left for the fund, I thought my choice wasnt going to be a detriment to my longterm goals for the account.

There are calculators on the net showing all sorts of stuff for what kind of effects borrowing from 401k's does. Check them out before you make a decision.

Do the math... the 10% penalty is there to stop you, otherwise it can make sense.

this whole bs of "never" touch your 401k is for fools.

Do the simple calculation and if it makes sense then do it, nowdays borrowing money is cheap though and can hardly defeat the 10% penalty unless your jacked under a credit card with 28% interest, just remember YOU must put in extra to get back to where you were plus some.

its that simple. Ive seen morons paying 28% interest on tons of money on credit cards.

ALSO MAKE SURE your calculating CORRECTLY. Most loans are front loaded, meaning you pay the interest up front so make sure you know exactly how much your going to gain.

There is no reason to get out of a car loan at the end unless its insane interest. Credit cards are much simpler to determine if its the right thing to do esp since obama got those credit card rules(they put the total right on your statement). The 20% tax is disregarded since you pay that anyways... you pay it on your 401k and your take home pay... its the 10% that really is what matter... so yes cash it out if your paying 15%... its not worth it if its less than that actually.

yes look at loans first of course, you prob dont have enough to get a big loan but you don't take the 10% and you pay yourself back. check out insurance policies also if you have some.

10% hit on a 401k? It's more like 30%.

I think that might be the way to go. I'll have to call Fidelity and see how much I can borrow and see how this all works. I would love to be able to borrow $4,000. None of my debt is high interest. I just want to get out of it fast so I can start putting money into savings again so I can have money just in case as well as put money aside for a down payment on a house.

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Originally Posted by DocWalt

10% hit on a 401k? It's more like 30%.

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Yeah, the 20% is taxes which you pay no matter what. You only have to pay the extra 10% for withdrawing early. I think that's why he was focusing on the 10%.

Obviously borrowing on your 401K is a much better idea than just withdrawing. Go for that if you want :p

Ok, it was so poorly worded, I had no clue what he was saying.

Well, borrowing is out. They'll only give me $1,200 and I don't plan to be with my current employer beyond the end of the year which causes problems if borrowing against the 401k.

Look into taking a loan against it instead. Even though you're paying interest, you're also making interest. If the total interest you expect to payback is less than the 30% hit you'll take than this is the better option. You'll get the same amount of money(or more) and it wont cost you as much.

I'm obviously not privy to the details of your situation but if you can make minimum payments on the lowest interest rates and pay off the highest interest rates without having to take money from your 401k that's my recommendation. But everyone's situation is unique so in the end you need to decide what is best for you

edit: nevermind the borrowing you answered that while I was creating my post

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Originally Posted by Polygon

Well, borrowing is out. They'll only give me $1,200 and I don't plan to be with my current employer beyond the end of the year which causes problems if borrowing against the 401k.

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job transitioning is a risk man... so beware elminating any reserve you have at your disposal. Lets say your new boss hates you? or you can't stand him.

are you 100% vested? thats another thing to check. If you leave they might force you out of the 401k anyways.

I like to stock up before I take a new job, that way if I don't like my new boss/job I can tell them to f off and take some time off looking around.

if you have your own insurance policy you can pull from it without paying it back for a while normally(or you just have to pay back your own interest).

I took 2500$ a long time out of an insurance policy... cost me 200$ a year for about 5 years before i paid it back.(i was netting the 200$ in the account).

look at getting a private insurance policy, even a 50$ a month deal isnt bad at your age, they can be treated like a 401k also.

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Originally Posted by DocWalt

Obviously borrowing on your 401K is a much better idea than just withdrawing. Go for that if you want :p

Ok, it was so poorly worded, I had no clue what he was saying.

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no you just didn't read the post... skimmer!

Maybe it is different from state to state but in my state you can not take your 401K unless you get fired, quit or have proof of its absolute necessity to get by. This pisses me off and makes me want out of the plan even more. Basically its not your money until the government says so.

You do it once, it'll be easier to succumb to the temptation the next time you need bucks.
Hunker down, pay out the bills.
$3500 is not worth the loss of $5K which is now, at your point in time, going to start to generate good returns & interest

I personally dont have faith in the 401K system anymore. I think its a big scam to make wall street rich while you may make money or you may lose a lot.

Bad idea, never borrow from your 401k. Just not worth it.

You are selling your future short, time and compound interest will be your friend if you keep the money in there.

No, I read it Mikes, it was poorly worded.

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Originally Posted by EZnTn

You do it once, it'll be easier to succumb to the temptation the next time you need bucks.
Hunker down, pay out the bills.
$3500 is not worth the loss of $5K which is now, at your point in time, going to start to generate good returns & interest

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or sit there doing nothing... or even tank depending on what you have it in...

I've been looking into this, its not "just" a 30% hit.

Its you take the funds from your 401k it is 100% taxable. Federal, state and city/county if you have those. The entire amount will be added to your gross taxable wages.

You will have 20% deducted as a federal tax withholding.

You will have 10% deducted as a penalty.

What that means is that when tax time comes around you could be taxed in total greater that 20% and you could end up with a smaller refund or paying more(all dependent on your overall tax libality).

I wouldn't do it if your current loans/ credit cards are not high interest. Just keep at it and making over payments to pay them off. Set up a strict budget and stick to it.

I haven't paid any interest in 4+ years besides my home and student loans. Before that I had almost 10k in debt(being a stupid 18/19 year old) But I still live paycheck to paycheck trying to make ends meet. My 401k is slowly growing(although my company quit matching about 2 years ago) I'm slowly paying down the mortgage, and my wife's masters degree loans just dropped in. Which SUCK! lol

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Originally Posted by 91stealthrt2

I wouldn't do it if your current loans/ credit cards are not high interest. Just keep at it and making over payments to pay them off. Set up a strict budget and stick to it.

I haven't paid any interest in 4+ years besides my home and student loans. Before that I had almost 10k in debt(being a stupid 18/19 year old) But I still live paycheck to paycheck trying to make ends meet. My 401k is slowly growing(although my company quit matching about 2 years ago) I'm slowly paying down the mortgage, and my wife's masters degree loans just dropped in. Which SUCK! lol

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Bingo. He's looking for an "easy out" which is what got him into this mess in the first place.

It is about a 30% hit, or 25% at least. If you're under age 59.5, you have an automatic early withdrawal penalty of 10% that goes to the government. So basically, you are withdrawing 5k and you might as well light $500 of it on fire. The other is added as income, of which you are taxed at your regular rate. Figure 15 to 20%. So, unless your credit cards are charging you a higher rate than 25-30% interest, you are doing the wrong thing by withdrawing from the 401k.

If you call Fidelity and talk to someone with a lick of sense, they'll tell you the same thing. ;)

Taking a loan is a bit different, but as you've already found out, you can't take the full amount. Some companies will let you take up to 50%, some are 30-40%, it just depends. $1200 seems a bit low, are you sure the $5k is fully vested? You don't get to withdraw any of the money that isn't vested.

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Originally Posted by Polygon

So, I want to get out of debt and NOW!

I've been paying almost everything I have into my debt and it's going down but not fast enough. So, I live paycheck to paycheck since I'm overpaying on my payments. I looked and I have $5,000 in my 401k which I've never intentionally put money into. I found out that my company has been putting money from my paycheck into it over the pas 2 1/2 years and they also do 100% matching.

So, if I withdraw that I take a 30% hit which leaves me with $3,500. This would pay off my Stealth and the rest, paired with my regular payment, would drop my credit card down to $1,200. That only leaves me with a personal loan and a student loan.

This is pretty tempting to me as once the credit card is payed off I would take that $500 and month and put it with the $400 a month I would be paying on the personal loan meaning I could pay it off in a matter of months. I'm 29 and I have time to get that money back into my 401k after I'm out of debt as I can afford to pay extra into it.

I guess the question is, if you were in my shoes, what would you do?

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Good luck to you whatever you decide to do. I am thinking what you really need is a much higher paying job. Don't we all?

Yeah, I'm not fully vested. Hammer's right, I just need a higher paying job. I'm just going to leave it alone. If I was going to withdraw from it, it wouldn't make any sense until I find a new job anyhow and if I get a higher paying job, no real need to pull that money anyhow.

Good conclusion!

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Originally Posted by Polygon

Yeah, I'm not fully vested. Hammer's right, I just need a higher paying job. I'm just going to leave it alone. If I was going to withdraw from it, it wouldn't make any sense until I find a new job anyhow and if I get a higher paying job, no real need to pull that money anyhow.

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:up:...because I have to have at least 5 characters in my response.

I didnt read all of this thread but if you take money from your 401k without the intention of repaying there is a penalty assessed and the charges come out to more like 48 % +/_ of what you are withdrawing ...

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Originally Posted by Polygon

Yeah, I'm not fully vested. Hammer's right, I just need a higher paying job. I'm just going to leave it alone. If I was going to withdraw from it, it wouldn't make any sense until I find a new job anyhow and if I get a higher paying job, no real need to pull that money anyhow.

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You should be contributing the minimum amount to get the 100% match from the employer. This is the easiest money you will ever make. Just tighten your belt and pay off your debts as you can. And get more education or training to get a better job. And try to get vested before you leave that job, otherwise you'll be leaving their matching contributions on the table when you exit. Also, when you leave a company take your 401K money and open a rollover IRA. You wont be taxed and you can invest the money any way you choose instead of being limited to a companies investment choices.

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Originally Posted by UTRacerX9

It is about a 30% hit, or 25% at least. If you're under age 59.5, you have an automatic early withdrawal penalty of 10% that goes to the government. So basically, you are withdrawing 5k and you might as well light $500 of it on fire. The other is added as income, of which you are taxed at your regular rate. Figure 15 to 20%. So, unless your credit cards are charging you a higher rate than 25-30% interest, you are doing the wrong thing by withdrawing from the 401k.

If you call Fidelity and talk to someone with a lick of sense, they'll tell you the same thing. ;)

Taking a loan is a bit different, but as you've already found out, you can't take the full amount. Some companies will let you take up to 50%, some are 30-40%, it just depends. $1200 seems a bit low, are you sure the $5k is fully vested? You don't get to withdraw any of the money that isn't vested.

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You're making a poor assumption in that there will be no income taxes if a person is 59.5 and withdrawals from 401k. I don't care to look up what that rate is, but i know it is not 0%.

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Originally Posted by Zybrainn

You're making a poor assumption in that there will be no income taxes if a person is 59.5 and withdrawals from 401k. I don't care to look up what that rate is, but i know it is not 0%.

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No, he said you pay a 10% penalty if under 59.5. Older than that and there is no penalty, you just pay regular income taxes. At his age he pays both which would be anywhere from 25% on up. If his state has income taxes he pays those too.

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Originally Posted by Jimvr4

No, he said you pay a 10% penalty if under 59.5. Older than that and there is no penalty, you just pay regular income taxes. At his age he pays both which would be anywhere from 25% on up. If his state has income taxes he pays those too.

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He mentioned that if your credit card interest is lower than 25% (10% penalty + 15% to 20% income tax rate), then he shouldn't pull any money out of 401k. This is making the assumption that there would be no income taxes charged at 59.5, which is not correct.

Most people assume their income will be lower at that age so you'd probably fall in a lower tax bracket. My off the cuff math tells me he should really consider pulling money out of 401k if his credit card interest rate is somewhere between 15-20% (10% penalty + 5-10% lower income tax rate at 59.5)