401k withdrawal

We are in about $20k of debt. I am 27 and my husband is 29. I worked until 3 years ago when my daughter was born.  My husband has a full time 40+hr/wk job. I have $23k in my 401k. With the refund we should have coming back this year, plus the amount that we should have after taxes and penalties with the 401k  we could completely pay off our debt and start completely over. I know that people usually advise against these things, but I'm desperate, I feel like we are never going to get out from under it and our housing situation could change at the drop of a hat, so having no debt payments would be very beneficial. We would cut up and remove EVERY SINGLE credit card from the house, which I'm going to do anyway. Only use money we have in the account. Scrimp and scrape and save. Open a new retirement account for each of us. Basically start back at level 1 and work ourselves back up. I feel like it would be best for us in the present, and bad for our future selves, but possibly the best for our future selves as well if we can get on track? I don't know. I'm rambling.


Anyone done this? Talk me off the ledge. 

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  • DON'T DO IT. 

    At 7.5% return, that money is a future $359,000 at 65. Plus you do not get $20,000, you get much less after penalties and applicable taxes. Do you want to take $360,000 away from yourself? $20,000 is so payable. It's a few hundred dollars a month over five years. Focus on not spending more than you have and putting aside money for true expenses, then chip away at the debt. You could drive Uber a few nights a week and earn enough to pay the debt off in a couple of years without even touching your regular budget. 

    Like 14
      • nolesrule
      • Stealing From the Future fix is an improvement but is incomplete....
      • nolesrule
      • 3 yrs ago
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      What WordTenor said. +100

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  • I agree that it would be better to take a disciplined approach to paying down the debt as opposed to draining your 401K.  I would cut up the credit cards, cut spending to the bone, work extra, sell things if possible.  This approach will not only preserve your retirement but will build discipline for future decisions.  Check out Dave Ramsey's website and radio program.  He also has a lot of youtube videos.

    Like 2
  • You say that the tax refund you'll be getting will at minimum balance out the taxes and penalties on cashing out the 401(k). In that case, it sound like your husband is having too much withheld from his paycheck. Maybe look at adjusting that amount and use this additional money in his paycheck to go straight to debt repayment.

    Like 10

    Totally agree with WordTenor.

    About four or five years ago, I had a similar thought.  My DH and I had a lot of debt, more than yours (around $40K) and I had the money sitting in my 401K.  I thought about withdrawing it to pay off our debt.  But after doing a lot of reading and researching, I decided not to go that route.  

    Once I found YNAB, we decided to follow Dave Ramsey's babysteps to get out of debt.  (We don't really subscribe to much of his other advice, but the babysteps worked for us and kept us motivated).  The thing is -- we had decent income and had the money to pay off the debt if we got on a budget and a plan and tightened up our spending.  We had been living above our means for years.  And we had to sit down with each other and have a Come to Jesus Talk and finally say "NO MORE".  

    You say "we would only use money we have in the account, scrimp and save", so if you aren't doing that already, I think using money from a 401K will only hurt you in the long run.  You and your spouse need to set up a working budget that balances and has money left over to pay off debt.  If you don't have that now, as soon as you pay off that $20K in debt, you could be setting yourselves up to go back into debt.  You need a complete working budget with a small emergency fund to get started, rainy day funds, and trim the excess spending.

    Paying off debt and budgeting is math.  You can lower expenses (cut cable, no Starbucks, eat at home via meal planning, no vacations, sell a car and buy a cheaper one in cash) or increase income (someone delivers pizzas, drives Uber, you go back to work).  That is what you do to get out of debt.  

    If you can find an extra $1,000 a month (increase income or decrease expenses), you can be out of debt in less than 2 years.  

    And I agree with jenmas -- if you're getting back a large tax refund, you should adjust your withholdings so you can have that money in your budget *now*.

    Best of luck to you!

    Like 10
  • I don't have any long words of wisdom, but DON'T DO IT!!  

    Like 4
  • A word of advice? I know this may seem counterintuitive, since money is really tight, but you should find an INDEPENDENT financial advisor that can help you set up a plan.  Perhaps someone geared to dealing with people in debt situations.

    Like 1
      • Heather
      • YNAB-Obsessed since 2014
      • estheticianbabe
      • 3 yrs ago
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      Silver Boa Financial advisors are usually sales men, unless you get a fee-only financial advisor (and one that is a fiduciary) and even then, she'd likely be needing to invest something.  Financial advisors can't tell you any more about paying off debt than can listening to someone like Dave Ramsey for free.  I wouldn't recommend a financial planner/advisor unless someone has a significant net worth, complex investments (businesses, rental properties, ample assets), and even then, you can do most of your own planning yourself with proper research and simple investment strategies (Boglehead's).  

      IF she chooses to withdraw money out of her 401K, I'd consult a CPA to figure how what kind of tax implications she'll have for 2018.  The money withdrawn will be subject to taxes and penalties and I believe count as income for the year, so in that case, a CPA would be a better choice if she chooses to go down that road.  

      Like 5
  • Yes, a fee-only advisor would be the way to go. I met with one recently and found the meeting to be enormously helpful. And she was certainly not a sales "man". I don't think they are all geared to high net worth individuals. This is a good resource for finding someone -- and again, just a suggestion, but something to consider. https://www.napfa.org

    Like 1
  • Oh man, do NOT do this. DO NOT. Other people have done the math much better than I have, so I'm just going to add my voice to the chorus as a form of support. 

    If you give a little more information about your situation, I bet the people on this forum can offer some really great ideas. My first thought--and there could be all sorts of reasons why this might not work--but if you're at home with a 3 year old and live somewhere with any kind of population density, you could almost certainly do some babysitting. One of my neighbors who stays at home watches half the neighborhood's kids. (Not full time, just as back up in emergencies or snow days, etc.)

    Like 2
  • The prevailing chorus of (very wise) voices here will tell you not to do it.

    I generally agree with them; however...


    I've done it (though it was a 401(k) loan, not a withdrawal - better less bad option if it's available to you, as there are no taxes or penalties as long as you pay it off in a timely manner).  It was absolutely the right choice for me.  The peace of mind was totally worth the trade-off.  

    Two very important points:  

    1) I had my financial life under control and was not concerned that I would run up debt again.  

    2) I had a stable job and knew I could max out my contributions in subsequent years.  While this wouldn't make up for what I had lost, it did guarantee me - well, as much as anything can ever be guaranteed - that I wouldn't fall even further behind.

    Like 1
  • This feels like a cross-roads type decision to me, one of those life defining moments that you will be able to look back on 10, 20, 30 years from now and point to this specific decision as the turning point that altered the trajectory of your life. Choose the easy way out with big repercussions or .....

    One of the major things that happened to me when I worked my way out of debt is that I ended up having to make a series of really tough value decisions as I reduced my life-style spending. Did I want the nice apartment and no car, or the less fashionable address and a car? Did I want to buy gifts for Christmas, or did I want to have an expensive daily coffee on my way to work every day?   Most people generally come out the other end of this process leaner and meaner, more in touch with what they truly value, willing to sacrifice the meh in order to get the sha-zam, and now accustomed to living on less than their income. The amount they regularly carved out of their budget to use on smacking down debt is now entirely available for all sorts of savings goals.

    If you liquidate a retirement account, you won't go through that trimming down exercise, and you won't have altered your life-style spending, and there won't be any extra available for building up. It's really the act of creating the gap between your income and your spend that sets you up for success.  It's how you get ahead, avoid living on credit, and save for your longer-term goals.

    TL:DR:  DON'T DO IT!

    Like 8
  • Thank you for all your words of wisdom. I will not be pulling that money out of my account. I have just been feeling very overwhelmed lately with where my finances are going.

    I agree with Michele  that we won't have to do the trimming down exercise if I do it that way and it will not be helpful in the long road if we don't struggle through it. So, I found something I can do online to earn some extra cash. I will be stopping most, if not all, of my subscriptions. Going to meal plan and shop at Aldi for lower prices. Cut out any unnecessary spending, etc. 

    Like 8
      • MicroSpice
      • Crazy Person
      • Microspice
      • 3 yrs ago
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      Christen You can do this! I know how disheartening it is to look at a pile of debt and see no way out of it. I know. I'm currently staring at such a pile that is more than 10 times the amount you're carrying. We have different situations, to be sure, but we can both do this. It's going to take time, support, and commitment. Just keep going.

      Like 4
  • Been there. Done that. (Loan, though, not withdrawal.) Regret it EVERY time I look at my 401k balance. 

    Also paid off about $13k in debt. Debt is doable. You can do this! It won't last forever.

    Like 3
  • I've done it and regretted it.  Unless you can demonstrate without a doubt you can change the behavior that led to the debt, you will end up in  the same place you are today.  You are young enough to let compound interest serve you for your retirement needs but that's not really the problem.  It's the spending that got you into this problem.   My husband was in school for years and we essentially "charged" his salary.  We wracked up a ton of debt because we were lousy at reigning in our spending.  I would do everything all the financially solvent folks in this forum have said for a year.  If you don't see an significant decrease in your debt, you haven't really gotten serious about getting out of debt and will end up  in the same place in a few years.   If you have made progress, the thrill of taking control of your spending will inspire you to continue to climb out of debt. 

    Like 4
  • Hi - i agree with everyone else here - don't drain your 401K!

    Also - check out the Debt Smackdown Community Challenge! It's very motivating and supportive. You can do it! Keep paying your debt, little by little, and in a few months you will be a little further ahead.  You can do it. Don't give up on yourself.

    Like 1
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