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View Full Version : Cashing out 401K...advice please


SLDL
07-11-2006, 02:53 PM
My husband has a 401K plan but it seems to be losing money (over the last yr. and more). All the while, we are piling up interest on a Home Equity Loan. I just wanted your expert (or not so expert) opinions about this. Has anyone cashed out their retirement plans early to pay off debt? He is just under 30 yrs. old so we are thinking that he'd have plenty of time to add more to the fund before we really need it. Advice please!!

100AcreWood
07-11-2006, 03:09 PM
My husband has a 401K plan but it seems to be losing money (over the last yr. and more). All the while, we are piling up interest on a Home Equity Loan. I just wanted your expert (or not so expert) opinions about this. Has anyone cashed out their retirement plans early to pay off debt? He is just under 30 yrs. old so we are thinking that he'd have plenty of time to add more to the fund before we really need it. Advice please!!

We did it many years ago. Be very careful because we only cashed out about $5k but the penalties and taxes were really high! We were shocked when we did our taxes the next year. On another note, 401ks are just one of those things you have to let roll (within reason). If you can change your allocations, then you may want to consult the company who manages the plan to see what else is available.

OceanAnnie
07-11-2006, 03:09 PM
This is just my perspective, not advice. If it were me, I'd consider rolling over the 401K into an IRA. There wouldn't be a penalty and you could start to see some positive activity (rather than negative).

Is there any place you could tighten the belt and apply the difference towards the home equity loan? I'd look at everything and see how it might apply. Ofcourse there are a lot of things to consider. That's off the top of my head with the information provided.

tar heel
07-11-2006, 03:14 PM
Very bad idea. This is a tax-sheltered fund, so you'll pay income taxes on it AND a 10% penalty. I would expect you would lose about 1/3 of the fund in taxes.

If his 401K is losing money, he needs to change what it's invested in. Remember that he didn't pay taxes on the $ that's in there, so even if he lost a little bit he's still ahead of where he would be if the $ had been taxed. (I hope that made sense).

Also, if his company is matching the 401K, then he should always contribute enough to get the match. Otherwise, he's turning down a raise.

mickeyfan2
07-11-2006, 03:20 PM
Don't do it. The tax implications are horrible. Try to use a different fund in the plan or see if you can roll it into a private retirement account. You never want to see the money in your hands and your name only. Early withdrawl is heavy on penalties. I would recommend a second job as a short term solution to pay off the loan.

janette
07-11-2006, 03:24 PM
Yes, bad idea. If you are at a 15% tax bracket you'll lose that plus the 10% of the 401K money off the top. A home equity loan is usually tax deductible so you'd have to be paying more than 25% interest to make it to your benefit financially.

Some other options might be slowing down your contributions to what the company matches and look at changing your investment funds to something with a better return.

Nicsmom
07-11-2006, 04:00 PM
I agree. Don't do it. First, does his plan even allow it? Typically you cannot take a withdrawal from a 401(k) just because you want to. He may have a hardship withdrawal available but as stated, you will pay federal, state taxes and a 10% to the IRS. There may be a loan available. If there is, you would not pay taxes or penalty as long as you pay it back via payroll. This is your retirement. The market has ups and downs. Ride it out. You don't want to cash it out when your account is showing a loss. By cashing out now you would realize the loss. Eventually it will go up again. You may want to look at changing the investments of your future deposits. Good luck with your decision.

DisneyBill
07-11-2006, 04:08 PM
This is just my perspective, not advice. If it were me, I'd consider rolling over the 401K into an IRA. There wouldn't be a penalty and you could start to see some positive activity (rather than negative).


If your DH is still with the same employer, he can't roll the money to an IRA.
If the equity options in his plan are all poor performers, I would suggest a look into other cash/guaranteed rate of return vehicles that are likely available in his 401k plan.

figment52
07-11-2006, 04:14 PM
This is a long term investment, over time it will have ups and downs but over the long run you will make more on what is in there now than if you invest the same amount 10, 20, 30 or even 40 years later. No much else works better than compound returns.

If you are currently investing and your employer does not match consider reducing (not eliminating) the amount you are contributing to your 401k now and apply that to your debt reduction.

Please meet with a financial advisor and find an alternative to paying off your debt with this money and properly invest what is already in your 401k.

ducklite
07-11-2006, 04:17 PM
Your problem is not with your 401K. Your problem is with the HELOC. Figure out a way to pay that off, without touching the 401K.

Reallocate teh funds in the 401K ot put it into a CD based IRA that will guarantee a return and stop loss if you can't handle the ups and downs of the market. But that HELOC neds to be addressed, because that is what is really costing you. If you haven't been making enough payments on the principle to be seeing it go down every month you need to figure out how, even if it means cancelling vacations of working a second job.

Anne

stemikger
07-11-2006, 04:24 PM
You will get hit with heavy penalties. If you have to, lessen your contributions and send extra to the home equity loan. But I wouldn't cash out the 401K - it is not worth it.

See if you could renegotiate the home equity loan into a fixed rate with your existing mortgage and make the combined mortgage a 15 year mortgage and send extra to that. This will shorten the time you are paying on the mortgage and you will get some tax breaks in the meantime.

It is never a good idea to cash out your 401K if you are younger than 591/2.

dvcgirl
07-11-2006, 04:50 PM
Just adding to the chorus....Terrible Idea!!! The penalties are killers and it's a very bad habit to get into.....

"Just under 30" means you should be investing a minimum of 10-15% of your combined income into retirement accounts. I know a lot of people in their 40s who started too late, and they are going to pay the price down the road.

Lock in on a rate on the HELOC....and live beneath your means so that you can pay it down. And possibly take a look at where you have that 401K invested to see if you can adjust it to get a better return.

MrsPete
07-11-2006, 10:50 PM
I have to agree with everyone else: 401K money shouldn't be touched; the penalties are too high. However, you can borrow against it, which would allow you to get rid of that home-equity loan (which is a dangerous thing -- fall behind, and you lose your entire house).

staceyfe
07-11-2006, 10:58 PM
Does your DH possibly have a cash-value whole life policy he could borrow against at a lower rate than the HELOC? Heed the advice of the very wise DIS Budget Board: don't touch that 401k!!

2buzzboys
07-11-2006, 11:22 PM
Another vote for DONT DO IT

MY husband cashed his out in 05 and we paid big time twice. Once when he cashed out then we got hit hard again on the taxes. We ended up having to pay back a lot of money on the tax return.We were not used to that since we always get $$ back. This was the first and only time I can say it was not better to give then receive.

4girlsmom
07-12-2006, 12:05 AM
Not worth the hassle. I cashed out an IRA to purchase our 1st home (which is allowed) in 1999. In 2002 the IRS audited us for it, took our next 2 years' tax refunds, and the fight wore on until this year when I finally got the tax money back. I will never cash out retirement funds early again.

Cheshire Figment
07-12-2006, 03:42 AM
To get a good idea of what it will reaally cost you, take last year's tax return, add in the full amount to be withdrawn from the 401(k). Then recompute the tax, then add the penalty which is 10% of the withdrawl and see what you will be paying.

bellarella
07-12-2006, 07:43 AM
Bad, bad, bad idea for many reasons.

1. He probably can't do it, unless he has left his employer. Possibly you could borrow against it, but it is still a bad idea.

2. You will pay penalties.

3. You will pay more in taxes.

4. You say you have been losing money in his account. Right now those losses are only "paper" losses. If you cash out, those losses become real and you will have done the worst thing in investing -- bought high and sold low. You don't say what your 401k is invested in, but if it is in a solid portfolio (index funds, etc.), then you just need to ride with the market and not look at your balance for awhile. The whole market is getting battered around a bit now, but that means it's time to be buying stocks/mutual funds/ETFs, not selling them. If, however, you have all of your eggs in the one basket of just your company stock or some other investment you have no confidence in, you should look at diversifying your portfolio. Whether you need to suck it up and take a loss on what you have already bought (if you think the company is headed to bankruptcy) and reinvest it elsewhere, or merely should divert future contributions into a more diversified portfolio is something you should talk over with a Certified Financial Planner.

But all in all, using retirement funds to pay off a HELOC is not a good idea. You are turning potential loss into actual loss, then paying off taxes, then paying penalties on top of that. You'll be getting cents on the dollar, plus undercutting the future earnings of your investments.

Oreo Cookie
07-12-2006, 08:00 AM
I'll join the band wagon. It's a bad financial decision for all of the reasons posted above.

Try sitting down and seeing if you can find other ways to pay down your HELOC. Also, contact your bank, maybe you can take out a home equity loan at a fixed rate, and get rid of the adjustable interest rate on the HELOC. It could save you some money in interest, especially since the feds won't be lowering interest rates anytime in the near future. I don't know the current rates, but it never hurts to ask.

Regarding the 401K losing money, see how the other funds offered in the program are doing, and move your allocations accordingly.

100AcreWood
07-12-2006, 09:10 AM
Did you mention whether the 401k is company matched? If not don't waste any time moving it to an IRA!

Also, if you're looking for solid advice on how to get out of debt I highly recommend "The Total Money Makeover" book by Dave Ramsey. I'm a huge fan and reference it often. He lays out baby steps for getting out of debt, saving 3-6 months of expenses, saving for college, and paying off your mortgage!

SLDL
07-12-2006, 06:29 PM
Thank you all so much for your responses! I really appreciate it!

maryssasmom
07-12-2006, 07:37 PM
I work in the 401k division - bad idea. 20% mandatory federal taxes, possibly state tax also - depending on where you live and then you will have to pay a 10% penalty tax because he is under age 59 1/2. he would be much better off rolling into an IRA.

SarahKate
07-12-2006, 10:14 PM
Everyone else is right, don't do it unless you roll it over into something else.

DH helped out his dad several years ago and cashed out his retirement plan (it wasn't that much about 7k) and gave his dad money.....the penalties were horrific. It was not a smart idea and I know DH probably wishes he would have done something different.