Need advice on 401k withdrawal

I have about $50K in my 401k. I have a $7K atty bill, and credit debt (mostly medical expenses) of appx $7K.

I net about 4500 per month, but just covering my needs costs $4000 ($1.8K for rent&utils, $800 transportation, $800 childcare). I also am staring down the barrel of student loans coming due - at minimum another $400/mo.

I know I should not touch the 401K at all. But I cannot meet my credit, attorney, and student loan obligations and keep food, shelter, and childcare going for me and my kids. If I take a loan against the 401K - it reduces my net by another 260 a month, leaving me $250 short for the student loan payment. Loans from outside sources charge higher interest and shorter terms. And the portion of my paycheck not spoken for already is so small… I really need to focus as much of it as I can toward an emergency fund. (I recently went thru a separation and divorce - I have no other assets that I can liquidate or borrow against.)

A little more background - loans have been on deferment the last couple years, interest keeps capitalizing. Total amount needed is $14k to clear the deck. Current tax bracket is about 16-20%.

My plan does have forms for in-service and hardship distributions. Everything I’ve read online tells me I am going to hear a big fat NO from the 401k plan admin. But really, it is my last, best hope. I know I will surrender appx $4-5K to Uncle Sam but it would absolutely put me in a stronger position.

Any advice, tips?

Cut up your credit cards if you don’t want to be right back here in six months.

Don’t forget Uncle Whatever-state-you’re-in.

I took a bunch of money out of my 401k last year and ended up owing almost as much in state taxes as in federal. Been paying it off monthly since.

Strongly consider doing an extended-term loan from your 401K (if that’s available) instead of a withdrawal. That actually worked out pretty well for me a couple of years ago.

I would be looking for ways to decrease my bills ($800 transportation?!) before sacking my 401K. Can you get a payment plan for the attorney? Can you transfer the cc to a 0% card so at least you’re not racking up interest on it?

I have trimmed and trimmed my budget as far as I can. Car payment is 350 (honda cr-v purchased prior to splitting) - gas is another $300! Tolls, taxes, and insurance. I rent a small condo, I have 2 little girls that I have 50% custody. No alimony, no child support.
If i take the loan and I get another job, I won’t be able to pay it off in sixty days.

Credit card debt is mostly medical but not the 7.9% of income…
Absolutely will not use them except for work stuff that will be reimbursed.
I need a new financial soul.

New cars are a luxury, especially ones that don’t get spectacular fuel economy. I recommend selling the CR-V and buying a Civic that’s about eight years old. Your fuel costs will go down, your monthly payment will go WAY down (or possibly disappear, depending on how much equity you have in the CR-V right now), your insurance will go way down (a well-used Civic costs much less to insure than a new CR-V).

Yes a Civic is less spacious, but - guess what - space is a luxury. Your budget is tight, you need to trim luxuries and make do with less: a less roomy, less luxurious, less shiny car.

Seriously. Go shopping, see what kind of price you can get for a used Civic, and then do the math; you’ll see that you will come out way ahead.

Housing? Don’t know where you live, but $1800 a month is about what my wife and I pay for mortgage+utils on a very nice 2000 square-foot house with a 2-car garage. Whatever you’ve got, consider downsizing to smaller, less nice digs.

Got a smart phone? Ditch it, get a cheap dumb cell phone, and use it sparingly; your cell phone bill will be cut in half.

Got cable TV? Lose it.

Eat out a lot? Knock it off. Depending on where and how often you eat out, you could save a couple grand a year by preparing economical (and healthy) meals at home.

Under my plan, your loan becomes a disbursement if you change jobs. So you’re about where you would be under the withdrawal you’re contemplating, minus whatever you’ve repaid of the loan to that point. Certainly no worse; potentially a good bit better.

Then again, under my plan, you can cash the whole thing (with tax penalties) if you change jobs–no hardship hoops to jump through. So there’s that.

I would add that if you take a loan out on the 401K, depending on the plan, you will need to remain working at that company as long as the loan is outstanding. If you leave the company, you will owe it all back in one lump sum. I am not sure what happens if you lose your job by no fault of your own - maybe the same thing. Something else to consider.

If you withdraw, you pay the taxes now and are not beholden to work there. I would recommend if you go this route, and it sounds like you are, you should develop a plan to restock, or catch-up the 401K to where it should/would be, once you are square with the other financial obligations and back on solid footing.

Good luck to you!

Thanks, Stu and Sno. Stu’s plan is brings quicker relief and forces the disbursement in event of separation in any case. Like a lot of folks, I could be happier elsewhere but need to plan that move carefully.

State tax is 5.75%

Don’t do anything with the 401k until you consult an attorney regarding your options for bankruptcy. The reason is simple: assets like 401ks are protect during bankruptcy, and debts like taxes can’t be discharged during bankruptcy. (This is the grossly over-simplified version.) You have at least $14k of debt that a bankruptcy could clear, plus your car loan. Maybe the attorney can even get you out of your student loans.

I have seen so many people trash their retirement accounts and rack up tax debt and only then consider bankruptcy, when the worst damage has already been done.

nm

Advice, tips? Moved from General Questions to IMHO.

samclemen, Moderator

That’s the rub with taking a 401(k) loan. But I wouldn’t let that stop me from taking a loan if it is otherwise a good idea. If you change jobs, you could convert it to a distribution at that time.

Between now and then, you’d save on the tax hit, and maybe pay down a bit so you’d only “owe”, say, 12,000 vs 14,000 (hence lower tax / penalty).

Are you currently contributing to the 401(k)? If so, then your cash flow won’t change (except it may not be pretax, so your taxes would go up a little). If you aren’t - then yes, your repayments would reduce your cash flow.

If you could swing that, then really that sounds like the best option for using the 401(k).

Is there any way to get a part-time job for the days your kids aren’t with you? What about signing up with, say, a babysitting agency? (easier if you’re in a larger metropolitan area).

There may be ways of getting hardship deferments on the student loans (I have no clue); if so, look into those.

Trading the car for an older econobox: an option, but with an older econobox you’d be looking at repair bills which are less predictable than a car payment.

Just thought of another option with the 401(k) loan approach: If you do change jobs, it’s conceivable that at that point you might be able to borrow enough money to repay the loan balance.

That would leave you with repayments on that, but no tax hit.

It sounds like you’re not even eligible to withdraw from your 401k, unless you’ve been making after-tax contributions. Assuming you’ve been putting in pre-tax money, you generally can only withdraw it if:

  • you are aged 59.5
  • you leave the company
  • your plan allows hardship withdrawals and you meet the definision of hardship.

Obviously you’re banking on #3 but based on what you’ve told us I’m not sure you will qualify if your company uses the standard Safe Harbor definition of hardship. Remember that if you take an early withdrawal, not only will you owe Federal and State taxes, there is an additional 10% penalty tax on top of that.

With a loan, you avoid the taxes unless you leave your job and can’t pay it all back - in which case the remaining balance is treated like a withdrawal anyway so you’re no worse off than if you had withdrawn it in the first place.

But think about this – if you take out that $50k to get out of debt, where are your retirement savings? I agree with the poster above: if you’ve trimmed as much as you can, it’s time to toss the scalpel and get out the axe. Downsize your car for sure, your grocery budget, and (if you can) your rent. Take every single cent you can and plow it into your smallest debt until it is paid off, then move on to your next-smallest debt and so on. It will be hard but at your income level you should be able to pay everything off in less than a few years if you are willing to do it, and it doesn’t have to involve draining your retirement fund and forfeiting half of it to the government.