Should I cash out my 401k to pay off credit card debt?
I recently lost my job and my new job pays about $1300 less each month than the last one. I also have $15k in credit card debt. Things were getting out of hand, so I got into a debt management program about five months ago, who helped me set up a budget, reduce my interest rates, and move forward. The cards are all cut up, the accounts are closed, and everything was fine, but based on my old budget.
I am 26 years old and have $23k in my 401k from my last job. I’m wondering if it’s a good idea to cash out the 401k to pay off my debt. Right now, it would save me $550 a month in my payments to the DMP. I’m working on getting another part-time job, but even that may not help ends to meet. I’m a homeowner, but don’t have enough equity to get a HELOC, and my paychecks are NOT enough to cover everything. I’m living paycheck to paycheck and will have to cut into my savings very soon to keep going.
I have 35+ years left to save for retirement, but will I be screwing myself if I cash out?
I have already tried to renegotiate the payments through the DMP, but I would have to be on the plan for a year in order to qualify, and even then, it would only be temporary. Selling the house isn’t really an option, as I would probably lose money on that deal, with the market this bad. I have cut all ancillary expenses (cell is the only phone, have an efficient car that gets good mielage, I live on ramen noodles). I don’t want to lose the house and I don’t want to file for bankruptcy. I wouldn’t even consider doing this, but my income right now monthly is $700 less than my expenses. I’m working overtime, trying to get a part-time job, mowing lawns in the neighborhood for extra cash, etc. but there seems no end in sight. Paying off the CC debt would free up $550 a month, and I know the tax penalties are outrageous, but I’m running out of options. (Can’t bike to work for lack of bike and the fact that it’s 30 miles each way)
Selling the house and moving nearer to my job wouldn’t solve anything; the house may not even be worth what I owe on it in this market. Then I would lose money, while moving to a more expensive part of town. My car gets 30+ miles to the gallon, so it costs me less each day than public transit would.
My mortgage is not unaffordable. My girlfriend pays half of everything-mortgage, utilities, etc. I can’t ask her to sell the house, which we can only afford together, because of my past mistakes. My income, even without a second job, is enough to cover everything if I can only eliminate the debt. The debt, however, can’t be covered by another part-time job.
Thanks for all of you who gave advice.
Wesley
Frances
Yes. You’ll pay up to 50% of the account value in taxes and penalties and eliminating your savings to pay off a credit card that was likely used for dinners, trips, etc. – non-tangible stuff that is long gone.
Rollover your 401K into a no-fee IRA, and forget about it. Get a second job – that’s a great idea – and cut your expenses to next to nothing. Can you sell your house and move into a cheaper apartment or get a roommate? Sell your car and buy a cheaper used car (or bike to work)? Eliminate cable, cell phone, and other discretionary expenses.
Darren
Is it possible to renegotiate the payments through the debt management program? I would explore that avenue. If you cash out a 401(k) before 59-1/2 you may be hit with federal tax penalties.
Also, if the 401(k) has stock funds in it – now might not be the best time due to current market conditions.
Jesse
Yep………….messing with a 401 is expensive……and stupid………..do the math………..what would the 23K be worth in 35 years………….
Darlene
Do not cash out your 401K, you’ll get about $14K which will NOT pay off the debt.
You don’t say how much you make, which would help in giving you good advice.
If you received more than $1000 tax refund for 2007 taxes, then you can change your W-2 form to get more money in your paycheck. Add 1 allowance for every thousand dollars you received. e.g. $3000 back – 3 allowances.
I did this when I got my first house – it allowed me to eat each month.
Even if you do pay off your CC debt, you are still short $150 each month for expenses, so it’s time to redo the budget and get your spending under control.
Cecil
You say you have 35 years left to save for retirement.
Think of that another way: You have 10 years to save for a house, and do it right.
If you’ve already cut everything, but still spending more than you make, then you have to sell something to keep going. At this point, it’s either the house or the 401K.
I say sell the house, and live in the cheapest apartment you can suffer through, instead of cashing the 401K.
Then, 5-10 years from now, when you get your finances under control, then you can go house hunting again.
Vanessa
You _do_ need to sell the house, even in a down market. How are you paying the commuting expense? 30 miles one way in your car has got to be killing whatever little you’re making right now. Unless public transportation is an option, you really have no other choice but to move closer to work to economize and have a fighting chance to pay down your debts.
Cashing out your 401k will put you in an even deeper hole. You’ll have paid off the CC debt, but you still have the unaffordable mortgage and you’ll be starting from scratch w/ retirement savings. So hold onto the 401k and forget about it.
I sense that the new job is more than temporary, so you really need to live at this new income level. Cut back dramatically on your expenses short and long term, and good luck in the future.
Theresa
I’m looking at it this way: you’re 26 years old, you have a house (how much was your down payment? I hope you don’t have an ARM), you have a job (albeit not a great one from your post), and you have a 401K. The market isn’t great right now and selling your house might hurt you more in the long run, especially because it’s not unheard of for houses to sit on the market for 6 months or more right now. A second job is a necessity as is cutting out anything and everything that is not a necessity, cable, date nights, drinking nights, extra clothing, etc etc. It’s not unheard of for a 26 year old (or a 30 year old) to not have a 401K at this moment, or to have a scrawny one. While not the wisest move, if it’s the difference between bankruptcy and not, I would say to go for it, but then to make sure you make wise decisions in the future. Bankruptcy will affect you more in 30 years than money in your 401K will.
You mention savings, how much do you have? Would it help with your credit card debt?