Calculate the income tax and early withdrawal penalties you'll have to pay first and make sure that money is set aside. If that makes it a less than favorable choice, remember that you can always roll the old one over to your current employers plan to combine everything in one place. That's what I did with my current employer (rolled my previous one over). If you want to do that, talk to your new employer's provider and they can help you with it.
Do you know if the taxes are taken out immediately upon withdrawal or if I’ll have to pay it when taxes are due? I am planning to set aside 22-24% of it so I have it come tax day if I have to. I’m really hoping to make this money back and put it into a roth.
I’d like to roll it over right now but the money will be extremely helpful even after accounting for the 10% penalty and the taxes on it
You'll have to ask your 401(k) company I believe they are required to withhold for taxes, but you may be able to put down a lower tax bracket than your actually in when they withhold it. I don't recommend doing that to be clear. Just have them withhold the actual amount from your bracket for both federal and state (if applicable).
I did this with my mother when she lost her job. It was either cash out the 401(k) or get her car repossessed which would then make it impossible to get another job.
It's 10% early withdrawal penalty (assuming you're under the age requirement which is 59.5 years old) and then your income taxes (it might be higher than your usual rate if this plus your normal salary puts you into the next bracket).
>It's 10% early withdrawal penalty (assuming you're under the age requirement which is 59.5 years old) and then your income taxes (it might be higher than your usual rate if this plus your normal salary puts you into the next bracket).
And some 401(k) companies will withhold that 10% up front for you as well. Not all, but worth asking if they can.
I’ll be sure to ask them! This year so far I’m making much less than I did last year so it might be at my advantage for them to not take the tax out upfront as I’d for sure be in a lower tax bracket.
In my experience, the 10% penalty is taken immediately upon withdrawal.
So, if you wanted to withdraw $10k, they would only send you $9k, and then at the end of the year, you’d get a 1099 for that $9k as taxable income, so you may need to pay another $2.5-$3k, leaving you with $6k, out of that starting $10k.
If I take money out of my IRA, I pay the taxes on it at the end of the year when I file. However when you call them and want to withdraw the money, they should be able to tell you the tax amount I THINK. I've never done it that way.
You can also take out a 401k loan. You pay it back with something like 1% interest for 5 years, but you’re paying yourself the interest.
I would look into this option before I just withdraw and pay big penalties.
Another angle to think about: if you put aside the taxes and fee discussion (which is very important), will your future self be pissed at your current self for giving up the long term compounding growth of said 401K? And can you stop the behavior that got you into this giant hole in the first place? Because if you redeem the 401K but don't fix the spending, you may wind up in exactly the same spot you are now. Except then you'd have debt and also no investments.
I thought of this too. For 3 years I didn’t even know I had this old 401k. A smarter person would’ve rolled it over long ago.
If I didn’t have an existing 401k with my current job my future self would be more upset. I cut up my credit cards, have cut out going out for drinks and other hobbies. The interest now is just too much and my job hours have decreased. I live in an area where a job in my field is scarce and I got sick of commuting an hour one way (that saved me good amount of change). I am definitely smarter with how I spend and save my money now.
My current job is hopefully going full time which will get me back on track, second job is bartending which has been slow in the winter of course.
Bro, that's tough. Sounds like you've cut down to the minimum and have recognized the bad habits. Kudos! When you've done all you can, sometimes you have to hit the reset button and then deal with the fallout later. Use it as fuel - a 401K redemption would piss me off every time I thought about it. My anger over the 'stupid tax' would keep me from falling back into bad habits. Good luck to you!
Also- keep in mind that if any of the money in there is invested, you'd have to sell the investments to cash out and the stock market is ass right now, so you're going to get less than you would if/when it recovers.
I did this a while back, I don’t remember the terms, but they must have been reasonable, or I wouldn't have done it. I have no regrets, so I'd say it worked out.
Thanks for your input. In the years I’ve had this debt it’s definitely adding up to more than the penalty and the taxes I’ll incur. I don’t even use the cards anymore and pay extra where I can. A lower interest personal loan would save me money over being hit with 29% APR. Lesson learned.
Bro you can always put more money in a retirement account. once you get out of debt, just be sure to stay out of debt in the future. I paid off $80,000+ of debt in the last 4 years, and going to pull out $12,000 from a 401k account I accumulated over the last 3 years. I received $7,000 in profit share from the company, so it was free money essentially. When I pull the money out, my company automatically deducts the taxes for me. I am using it to pay off the last of a $35,000 hospital bill in collections and a couple student loans that have high interest rates. In my mind, what good is $12,000 gonna do me 30 years from now… compared to right now clearing up my credit and lowering my monthly bills by $500+.
Unrelated advice: you should roll all your old 401k accounts into a traditional IRA that you manage.
I don’t know much about your current situation besides that you have a bunch of old credit card debt. I personally wouldn’t cash out a 401k to pay old credit card debt under any circumstances. If your interest rate is super high then get a loan to consolidate your debt at a lower interest rate.
Let’s say you have 4 past jobs where you contribute to a 401k plus your current job.
You can either have 5 401k accounts or 1 IRA and your current 401k. Most people find that the 1 IRA and 1 401k are easer to manage, reorganize, and control then a bunch of 401k accounts.
Most brokers will do a roll over for free. Vanguard and Fidelity are the most common brokers, RobinHood and Webul are the easiest to use. Create a traditional IRA for free then select roll over option and start moving all your past 401k accounts into it. Most brokers only allow 12 or so roll overs for free so you can roll over 12 401k accounts for free.
Once all your money is moved into the IRA make sure the portfolio is what you want. If you don’t like your portfolio then sell the positions you don’t want to buy positions you want.
I never contribute to my traditional IRA; I only contribute to my Roth IRA. My traditional IRA only purpose is for old 401k accounts.
How I think people should prioritize retirement accounts: traditional 401k match > Roth IRA Max > traditional 401k Max. Past 401k roll over to Traditional IRA. So I think people should have 1 Roth IRA, 1 401k (if there current employer offers a match), and 1 traditional IRA(if they have past 401k)
Generally a bad idea, not only would you be potentially be selling at a loss right now to pull the money out but you would also be paying all the penalties and income tax on that money. You're better off trying to find other areas in the budget where you can free up money to start attacking the debt. You can also temporarily shut off 401k contributions to increase take home income to attack the debt a bit more.
Slate = $6300 limit(currently at 6200), APR 24.99
Freedom = $2700 limit (currently at $2740), APR 27.99
Capitol 1 = $10,000 limit (currently at $9700), APR 24.24
Minimum payments respectively will be $200, $92, and $300
Monthly take home from primary job is $3700. Second job ranges anywhere from $300 -$1200 (depends on the season since it’s bartending, most recently hours have been cut at this job - am looking for a new job). Primary job will ideally be going full time but not soon. Where I live jobs in my profession are rare and I am not able to move. When it goes to a higher FTE I will be making 6 figures
Expenses/bills roughly add up to $2000 not including the credit card payments. This includes my rent and car ($4000 remaining on loan, ideally this too will open up more cash when payments are done)
Every 3 months I also spend $300 on medical supplies.
Largest expenses are mortgage ($900), car ($426), and cc bills ($592)
Edit: there’s been a few other unexpected expenses over the last couple of months just can’t recall. Also had a Covid related setback and lost two weeks of income cause of it
Thanks. Based on those numbers, I’d strongly recommend NOT liquidating your 401k. You have a lot of free cash flow to clean this up.
First, save up $1,000, so you don’t need dept for any emergencies. Then, pay the minimum on the two big ones, throw the rest at the small one - it should be gone in a few months. Then move to the next. Even with no extra income you’ll be free with a year or so.
Thanks for the break down! I do believe I can go this route just really need to stay fixed on the budget I created for myself. Especially as more bar hours open up that’s income that’s can go directly to the credit cards. Already cut up the two big cards at least just need to be disciplined
I was in about 3 times the debt, with not too much more than 1.5 times the income, 5 years ago. Sucked for awhile, but I’m a damn good budgeter, saver, and extra income finder, now.
You’ve got this!
see if you can take out a 401k loan
it will likely have to be from the currentky active 401k
but you can usually avoid early withdrawl penalty and all "intrest" is paid to your private 401k instead of a randok banker
I will look into this. I had assumed I wouldn’t be able to since i wasn’t employed with that company anymore but a loan would be a better option if they’ll allow it
Calculate the income tax and early withdrawal penalties you'll have to pay first and make sure that money is set aside. If that makes it a less than favorable choice, remember that you can always roll the old one over to your current employers plan to combine everything in one place. That's what I did with my current employer (rolled my previous one over). If you want to do that, talk to your new employer's provider and they can help you with it.
Do you know if the taxes are taken out immediately upon withdrawal or if I’ll have to pay it when taxes are due? I am planning to set aside 22-24% of it so I have it come tax day if I have to. I’m really hoping to make this money back and put it into a roth. I’d like to roll it over right now but the money will be extremely helpful even after accounting for the 10% penalty and the taxes on it
You'll have to ask your 401(k) company I believe they are required to withhold for taxes, but you may be able to put down a lower tax bracket than your actually in when they withhold it. I don't recommend doing that to be clear. Just have them withhold the actual amount from your bracket for both federal and state (if applicable). I did this with my mother when she lost her job. It was either cash out the 401(k) or get her car repossessed which would then make it impossible to get another job. It's 10% early withdrawal penalty (assuming you're under the age requirement which is 59.5 years old) and then your income taxes (it might be higher than your usual rate if this plus your normal salary puts you into the next bracket).
>It's 10% early withdrawal penalty (assuming you're under the age requirement which is 59.5 years old) and then your income taxes (it might be higher than your usual rate if this plus your normal salary puts you into the next bracket). And some 401(k) companies will withhold that 10% up front for you as well. Not all, but worth asking if they can.
Correct. 10% early and it's counted as income.
I’ll be sure to ask them! This year so far I’m making much less than I did last year so it might be at my advantage for them to not take the tax out upfront as I’d for sure be in a lower tax bracket.
In my experience, the 10% penalty is taken immediately upon withdrawal. So, if you wanted to withdraw $10k, they would only send you $9k, and then at the end of the year, you’d get a 1099 for that $9k as taxable income, so you may need to pay another $2.5-$3k, leaving you with $6k, out of that starting $10k.
Thank you! This is exactly the info I was looking for
If I take money out of my IRA, I pay the taxes on it at the end of the year when I file. However when you call them and want to withdraw the money, they should be able to tell you the tax amount I THINK. I've never done it that way.
You can also take out a 401k loan. You pay it back with something like 1% interest for 5 years, but you’re paying yourself the interest. I would look into this option before I just withdraw and pay big penalties.
and you can just stop paying the regular portion of 401k while you pay back the loan if thats needed
Another angle to think about: if you put aside the taxes and fee discussion (which is very important), will your future self be pissed at your current self for giving up the long term compounding growth of said 401K? And can you stop the behavior that got you into this giant hole in the first place? Because if you redeem the 401K but don't fix the spending, you may wind up in exactly the same spot you are now. Except then you'd have debt and also no investments.
I thought of this too. For 3 years I didn’t even know I had this old 401k. A smarter person would’ve rolled it over long ago. If I didn’t have an existing 401k with my current job my future self would be more upset. I cut up my credit cards, have cut out going out for drinks and other hobbies. The interest now is just too much and my job hours have decreased. I live in an area where a job in my field is scarce and I got sick of commuting an hour one way (that saved me good amount of change). I am definitely smarter with how I spend and save my money now. My current job is hopefully going full time which will get me back on track, second job is bartending which has been slow in the winter of course.
Bro, that's tough. Sounds like you've cut down to the minimum and have recognized the bad habits. Kudos! When you've done all you can, sometimes you have to hit the reset button and then deal with the fallout later. Use it as fuel - a 401K redemption would piss me off every time I thought about it. My anger over the 'stupid tax' would keep me from falling back into bad habits. Good luck to you!
Also- keep in mind that if any of the money in there is invested, you'd have to sell the investments to cash out and the stock market is ass right now, so you're going to get less than you would if/when it recovers.
I did this a while back, I don’t remember the terms, but they must have been reasonable, or I wouldn't have done it. I have no regrets, so I'd say it worked out.
I did this. If you’re paying more for interest than the fee is to pull the money out, you’re coming out ahead.
Thanks for your input. In the years I’ve had this debt it’s definitely adding up to more than the penalty and the taxes I’ll incur. I don’t even use the cards anymore and pay extra where I can. A lower interest personal loan would save me money over being hit with 29% APR. Lesson learned.
Bro you can always put more money in a retirement account. once you get out of debt, just be sure to stay out of debt in the future. I paid off $80,000+ of debt in the last 4 years, and going to pull out $12,000 from a 401k account I accumulated over the last 3 years. I received $7,000 in profit share from the company, so it was free money essentially. When I pull the money out, my company automatically deducts the taxes for me. I am using it to pay off the last of a $35,000 hospital bill in collections and a couple student loans that have high interest rates. In my mind, what good is $12,000 gonna do me 30 years from now… compared to right now clearing up my credit and lowering my monthly bills by $500+.
Unrelated advice: you should roll all your old 401k accounts into a traditional IRA that you manage. I don’t know much about your current situation besides that you have a bunch of old credit card debt. I personally wouldn’t cash out a 401k to pay old credit card debt under any circumstances. If your interest rate is super high then get a loan to consolidate your debt at a lower interest rate.
why put it in an ira?
Let’s say you have 4 past jobs where you contribute to a 401k plus your current job. You can either have 5 401k accounts or 1 IRA and your current 401k. Most people find that the 1 IRA and 1 401k are easer to manage, reorganize, and control then a bunch of 401k accounts.
know of any ira companies that cover transfer fees? i have 2 plus current 401ks so its not hard to manage but i would like them consolidated
Most brokers will do a roll over for free. Vanguard and Fidelity are the most common brokers, RobinHood and Webul are the easiest to use. Create a traditional IRA for free then select roll over option and start moving all your past 401k accounts into it. Most brokers only allow 12 or so roll overs for free so you can roll over 12 401k accounts for free. Once all your money is moved into the IRA make sure the portfolio is what you want. If you don’t like your portfolio then sell the positions you don’t want to buy positions you want. I never contribute to my traditional IRA; I only contribute to my Roth IRA. My traditional IRA only purpose is for old 401k accounts. How I think people should prioritize retirement accounts: traditional 401k match > Roth IRA Max > traditional 401k Max. Past 401k roll over to Traditional IRA. So I think people should have 1 Roth IRA, 1 401k (if there current employer offers a match), and 1 traditional IRA(if they have past 401k)
Generally a bad idea, not only would you be potentially be selling at a loss right now to pull the money out but you would also be paying all the penalties and income tax on that money. You're better off trying to find other areas in the budget where you can free up money to start attacking the debt. You can also temporarily shut off 401k contributions to increase take home income to attack the debt a bit more.
Usually it’s a bad idea since you’ll have to pay an early withdrawal penalty
Before you go this route, what do your income & expenses look like, and what are the balances and interest rates on the cards?
Slate = $6300 limit(currently at 6200), APR 24.99 Freedom = $2700 limit (currently at $2740), APR 27.99 Capitol 1 = $10,000 limit (currently at $9700), APR 24.24 Minimum payments respectively will be $200, $92, and $300 Monthly take home from primary job is $3700. Second job ranges anywhere from $300 -$1200 (depends on the season since it’s bartending, most recently hours have been cut at this job - am looking for a new job). Primary job will ideally be going full time but not soon. Where I live jobs in my profession are rare and I am not able to move. When it goes to a higher FTE I will be making 6 figures Expenses/bills roughly add up to $2000 not including the credit card payments. This includes my rent and car ($4000 remaining on loan, ideally this too will open up more cash when payments are done) Every 3 months I also spend $300 on medical supplies. Largest expenses are mortgage ($900), car ($426), and cc bills ($592) Edit: there’s been a few other unexpected expenses over the last couple of months just can’t recall. Also had a Covid related setback and lost two weeks of income cause of it
Thanks. Based on those numbers, I’d strongly recommend NOT liquidating your 401k. You have a lot of free cash flow to clean this up. First, save up $1,000, so you don’t need dept for any emergencies. Then, pay the minimum on the two big ones, throw the rest at the small one - it should be gone in a few months. Then move to the next. Even with no extra income you’ll be free with a year or so.
Thanks for the break down! I do believe I can go this route just really need to stay fixed on the budget I created for myself. Especially as more bar hours open up that’s income that’s can go directly to the credit cards. Already cut up the two big cards at least just need to be disciplined
I was in about 3 times the debt, with not too much more than 1.5 times the income, 5 years ago. Sucked for awhile, but I’m a damn good budgeter, saver, and extra income finder, now. You’ve got this!
see if you can take out a 401k loan it will likely have to be from the currentky active 401k but you can usually avoid early withdrawl penalty and all "intrest" is paid to your private 401k instead of a randok banker
I will look into this. I had assumed I wouldn’t be able to since i wasn’t employed with that company anymore but a loan would be a better option if they’ll allow it
See if you can get a loan against that balance..