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I recently left a job for a new one. I mainly did so for more income and I also work a part time job for additional income to help with finances. Since leaving my job I am able to cash out my employers 401K or roll over. I know that cashing out there is 20% federal, 10% penalty and approx. 5% state taxes on the amount. This is not the ideal thing to do for the future. I am married 37, with 2 children with only this 401K account and will not be eligible until Jan. 2016 to start in the new companies 401K. My wife does have a few smaller 401k & IRAs. There is currently about $50000 in the existing account that I am considering cash out for about half.
I currently have personal loan, credit card, home & auto repairs, medical bills. After paying all my standard utilities, auto payments, daycare and all other debt it is a struggle to make it to the next month. I am behind on the medical bills because there just isn't any extra for them. I cannot sell my house easily as it need some repairs and it is not in a location for quick sales. My 2 cars are both negative equity so to sell or trade them in for something cheaper and better on gas I would need additional money.
After paying off everything I plan to contribute a set amount from each check into savings. I also plan to start the new 401K when eligible with 20% deduction to rebuild what was lost and set up a monthly budget to build savings better. Most of my debt was a result from never being able to get ahead enough to contribute to a savings account.
I am not sure what other options I have and was looking to see what others thoughts/opinions are on this situation. Cashing this out seems to be my last option I am at right now.
Cashing it out is an expensive mistake. The biggest cost is not the taxes and penalties, rather it is the loss of compounding which you can never recover. Roll it over to an IRA and let it grow. You will want to eat, live indoors, have utilities, and medical care after you can no longer work. Where will the money come from?
Where is your budget? Do you have a written budget? That is the place to start.
Honestly, it would be better to declare bankruptcy than cash out your 401K. 401ks & IRAs are generally protected in bankruptcy proceedings. I'm not saying you should declare bankruptcy (as most people who do it once will do it twice because most people still don't change their habits/expectations)....just trying to emphasize the importance of not cashing out your 401K. You wouldn't cash in your Social Security in advance, would you? (obviously because you can't) Same goes for your 401K. Social Security isn't enough for you to live on, and so the 401K is at least as important as SS.
And to top it off, chances are cashing out your 401K is a short term band-aid that will not solve the real problem. Most likely, you'll pay off the debt, only to rack up more down the line.
That's because lack of money is usually the result of poor planning, not thinking long term, unrealistic expectations, etc.
It sounds like there is no quick or easy way out of your predicament. Don't let yourself fall into that short term trap of thinking cashing in the 401K will fix things. You can't solve a problem with the same kind of thinking that created it in the first place. If you do, the problem will resurface again in short order.
When I see statements such as this,"Most of my debt was a result from never being able to get ahead enough to contribute to a savings account." alarm bells go off in my head. You'll never be in decent financial shape if you think that way. It's the mindset of putting savings last...and when you do that, you find out you have no savings and are in debt over your eyeballs.
Just a guess, but I would say most of your debt is probably from buying too much car, too much house (and probably a lot of other unnecessary purchases, large and small), and having a kid(s) before you were really ready financially.
I suggest you and your wife avail yourselves to the Mr. Money Mustache web site and start making some very tough changes in both thinking and behavior (but changes that will make things much better in the long run):
Dude, you've got two cars underwater (meaning you shouldn't have bought them to begin with because you can't afford them), credit card debt, medical debt, personal debt, a house it sounds like you can't really afford and on and on, and you're considering wiping out your 401k at 37 while giving over a third of it to the government in taxes.
You need to go full on Dave Ramsey plan or Mr. Money Mustache plan like the previous poster mentioned.
I was going to also recommend getting on the Dave Ramsey plan. Essentially you'll be paying off the smallest balances first and snowballing that money into the next sized balance and so on.
As was said by someone else, you need to take a long, hard look at your lifestyle and spending habits. Two cars underwater is a huge red flag, as is the personal loan and credit card balances. Seems as though you may not have a budget or, at a minimum, the ability to stick to any sort of budget.
I would only touch my 401K in an absolute dire emergency - i.e. someone is terminally ill and needs expensive surgery. I would rather walk away from my house and cars than to touch that money that I've worked so hard for all these years.
Have you considered working a 2nd job? I worked at Netflix opening envelopes at 4am in the morning for 2 years paying off debt many years ago when I, too, was in over my head. I got on the Dave Ramsey plan, got that 2nd income, reduced all my spending to near nothing and was surprised at how quickly you can tackle a seemingly insurmountable pile of debt.
I'll echo to leave the 401(k) alone. This is the absolute worst time to use it.
Honestly, it sounds like you're getting dangerously close to bankruptcy. Let's say it does come to that, your 401(k) is safe. If you use that to pay down some debt, but still declare bankruptcy anyway, you've basically just thrown the 401(k) down the drain.
Normally I'm not a fan of the snowball method, but I do see it's value. It's not a "net worth" financial strategy in the sense that it isn't the best financial move overall. But there's no denying it's an efficient "cash flow" financial strategy. When you're this close to the cliff, you need short term relief, not long term.
If you take that $25,000 that will immediately cost $8,750 in taxes and will cost you you $159,636 down the road in terms of retirement income(assuming 5% average return).
If I were you, I'd declare bankruptcy before I let that happen.
I have had my cost increase over the past year which has cause me to get to this point. I refinanced my house for better interest rate (2.5%) and eliminated my home equity loan at the same time. Then my escrow account fell short so my payment had increased. After refinancing my home, my hvac system went out. Purchased a new system and had to finance almost $8000. Then my work changed insurance and the deductibles went to $5000 per person from the 1500 when i started there. My kids had hospital visits and the copay and deductibles were another payment that came up from the high deductible. Plus when kids were out sick sometime 1 -2 weeks my wife was home from work and that was no income coming in. The accounting department at my work messed up my insurance and flex spending deductions and had to deduct more for about 6mo to make up for their error. Then my wife was out of work for about a month for gallbladder issue and removal she did get some disabillity pay. Then my wifes work changed her position eliminated any overtime option and made her work out of different offices in the same day. That doubled her gas expense. One of my cars are worth what I owe retail the other is about 2000 negative from retail. Trade in on this is way worse. They are nothing fancy about them, we didnt get high end cars. Both purchased used ones a van other a jeep. Our house is a small 1000sqft home nothing special or high dollar on it. We looked at selling the home but after realtor cost we would probably have to pay about 7000 to the realtor. We owe slightly less than what house last appraised for. We considered selling the house and getting an apartment but pur house payment is the near the same cost of an apartment we could get. Since we have pets we would have additional rent cost for them. Now i have med bills comi g in from my recent sickness being diagnosed with vertigo and my child had a broken arm so more med bills. My child required some therapy wgich was a monthly cost. Because of that he daycare had to change for her to attend the therapy needed. This was an increase in daycare. And now being enrolled in prek our public school charges 200/mo for that. Plus I need to go to dentist for a root canal which will cost me 500 -800. I used credit cards due to the changes above, we didnt have any extra for car maintenance needed (tires, brakes alignment). And also for some home repair items like faucets, garage door and for some grocery food shopping and back to school supplies. We try to use coupons as much as we can, wife purchases mostly used clothes for the kids we dont take vacations. Before all the changes noted above things were good had no credit card bills, no medical bills, just had cars house and utillities and thing were going good. I have a 2nd job and have had for about 2yrs now. I did plan on paying off the smaller loan and hen appling that amout to the next as stated in above post but we can never seem to get to that point anymore. When we did get there it seemed as though thats when something happend and added more payments.
It sounds like they've moved you to a high deductible health plan (HSA/HRA). That stinks just starting out, especially with kids, because you never seem to be able to save up enough. You really have to max out your FSA plan to cover the deductibles there or else you're paying tons of cash just to meet the ridiculous deductible.
I think the lesson learned in all of this is to have an emergency fund. I know that's not a solution and not what you want to hear right now, but if you had, say, $20K saved up for emergencies many of these things could have been taken care of without the need for additional debt. Just something to consider for future reference.
Can your wife find salaried work? So if she is unable to work for a day she'll still get paid. And try and find her something that has good benefits that you can move your family onto.
Can you live with one car? If not, can you trade down for a lesser car? A good, use Camry or something with high miles might be a good bet.
Can you find a higher paying job yourself? Even for the 2nd job? You need to 1) Increase your income and 2) reduce expenses immediately. Easier said than done, I know. Just some ideas.
Cashing out your 401k will not change your higher property taxes, your higher medical costs, of your daycare expenses. You will still have all of that to pay, and your 401k will be gone too.
Do you have a written budget? If not, make one. What is coming in, what is going out? Write it down. What is being set aside for future car/home maintenance, medical costs, etc.? Write it down. Which expenses can be reduced or eliminated? Cut out extras. Stop new retirement contributions if necessary.
Do you know where every dollar goes? If not, start tracking. Many people are shocked to see their expenses in black and white. I know that I was. How much is slipping away for meals out, late fees, miscellaneous items here and there, etc.?
A lot of people like Mint.com for tracking expenses. Some prefer carrying a notebook and jotting EVERYTHING down. Personally, I like to put everything I can on my rewards credit card, very easy to categorize my expenses. I give myself a small cash allowance for incidentals and don't track that, it's just my "cash allowance" expense.
Are you current on everything?
If you want to post your income and expenses, I am sure you will get a lot of helpful feedback. If you don't, that's OK, but you need to go through the exercise for yourself.
What does your wife think? Do you make the financial decisions alone?
I have had my cost increase over the past year which has cause me to get to this point. I refinanced my house for better interest rate (2.5%) and eliminated my home equity loan at the same time. Then my escrow account fell short so my payment had increased. After refinancing my home, my hvac system went out. Purchased a new system and had to finance almost $8000. Then my work changed insurance and the deductibles went to $5000 per person from the 1500 when i started there. My kids had hospital visits and the copay and deductibles were another payment that came up from the high deductible. Plus when kids were out sick sometime 1 -2 weeks my wife was home from work and that was no income coming in. The accounting department at my work messed up my insurance and flex spending deductions and had to deduct more for about 6mo to make up for their error. Then my wife was out of work for about a month for gallbladder issue and removal she did get some disabillity pay. Then my wifes work changed her position eliminated any overtime option and made her work out of different offices in the same day. That doubled her gas expense. One of my cars are worth what I owe retail the other is about 2000 negative from retail. Trade in on this is way worse. They are nothing fancy about them, we didnt get high end cars. Both purchased used ones a van other a jeep. Our house is a small 1000sqft home nothing special or high dollar on it. We looked at selling the home but after realtor cost we would probably have to pay about 7000 to the realtor. We owe slightly less than what house last appraised for. We considered selling the house and getting an apartment but pur house payment is the near the same cost of an apartment we could get. Since we have pets we would have additional rent cost for them. Now i have med bills comi g in from my recent sickness being diagnosed with vertigo and my child had a broken arm so more med bills. My child required some therapy wgich was a monthly cost. Because of that he daycare had to change for her to attend the therapy needed. This was an increase in daycare. And now being enrolled in prek our public school charges 200/mo for that. Plus I need to go to dentist for a root canal which will cost me 500 -800. I used credit cards due to the changes above, we didnt have any extra for car maintenance needed (tires, brakes alignment). And also for some home repair items like faucets, garage door and for some grocery food shopping and back to school supplies. We try to use coupons as much as we can, wife purchases mostly used clothes for the kids we dont take vacations. Before all the changes noted above things were good had no credit card bills, no medical bills, just had cars house and utillities and thing were going good. I have a 2nd job and have had for about 2yrs now. I did plan on paying off the smaller loan and hen appling that amout to the next as stated in above post but we can never seem to get to that point anymore. When we did get there it seemed as though thats when something happend and added more payments.
I am very sympathetic about the medical bills. But the bottom line is you can't afford your current way of life, and that doesn't sound like it's going to change anytime soon....so raiding the 401K isn't going to fix it. I suspect your biggest issue was having kids before you could really afford them (I know that will make people mad at me), but you can't change that.
It's time to something radical like Mr. Money Mustache or Dave Ramsey. Put everything you can into it. Write down or track every penny you spend. Get into the mindset of making every sure every purchase is a true need, and getting the best possible price to meet those needs.
If, after a year or two, you aren't getting anywhere after making real and sincere efforts to earn more and spend less, then declare bankruptcy. But, whatever do you, don't raid the 401K.
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