I need to cash out my 401k
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Anonymous
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Yes, it is a bad idea, I know, it is the last resort, I know. But hear me out first and then tell me your thoughts. I am a 31 year old single mom who just started a new job. I don't have a lot of $$ in my old 401k, the total is $12K. I received a letter from the plan stating that if I were to cash it out now, I would get $9600 as 20% would be withheld for federal taxes. It also adds : " This amount may be further reduced by additional federal income taxes, state and local income taxes or penalties you may owe". Do you know what the additional fees are?
Now, why do I want to do this? I make $70k/ year and have $7k in CC debt at high rates around 20%, with daycare and these credit card debts, I live paycheck to paycheck. I feel like it is a vicious circle, I don't have an emergency fund because i have 0 left at the end of the month, and because I don't have an emergency fund, i keep using the credit cards whenever something happens, increasing the balance ughhh, at this rate, it will take me years to pay off this $7k, I just don't have the extra funds. Now if I cash out the 401k and get $9k, I can pay off the $7k and have $2k in an emergency fund and start over my financial life. I could rebuild a $12k 401k in 2 years, but if I keep paying these credit card fees, I just don't see a way out. Thoughts? would you do it? Thanks |
Anonymous
The additional taxes will be at least another 10% because of the early withdrawal penalty. State taxes would be another 5% unless you live someplace like Tennessee or Florida or Texas, where there is no income tax. So, really, you won't net $9,600. You'll net more like $8,100. It's a bad idea. You'll just run up the cards again -- quit robbing Peter to pay Paul. |
Anonymous
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You will take home about $7,300ish. Here use this.
https://www.wellsfargo.com/investing/retirement/tools/401k-early-withdrawal-calculator/ |
Anonymous
| OP Here- How is this any different from the 25% Im paying on the $7k credit card balances for God knows how many years? |
Anonymous
| I understand if you really need it. 401k are great for high earners in large companies. They are a very bad system for saving for retirement for everyone else. It will cost you- 10% off the top, what ever your fed rate is this year and sate income tax. Good luck. |
Anonymous
Well, you can transfer those balances to a lower rate credit card. Shop around. |
Anonymous
| I agree it's a bad idea but you never paid the taxes upfront so this calculator is factoring that in too which makes it seem worse. |
Anonymous
| OP Here- The only reason I am considering this is that i really do not see any way out of the CC debt. I feel like I will get other emergencies throughout the year and will increase the balance in the CCs because i don't have an emergency fund and I can't have an emergency fund because I can't save anything at the end of the month. The only way to reverse this is to cash this out. If YOU can think of any other way to get me out of this , please let me know. |
Anonymous
| Yep 401k is a tax deferred system. You pay taxes when you take it out, maybe at a lower rate b/c your income maybe be lower after you retire. Just remember the kid is not in daycare forever, so that will reduce and go way over time. It may be easier for you just to take a loan like from a bank and pay off the credit cards? |
Anonymous
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OP, I would only consider this if you cut up your credit cards and never use them again. Otherwise you just continuing a very bad habit. Also, make sure you set aside any amount of the pay our to cover the penalty and state taxes if they aren't withheld.
You should first look into the lower interest cc options. |
Anonymous
| So the other question is once the cc is paid off, can you reduce your living expenses? |
Anonymous
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OP back- Yes, I think I am disciplined enough not to use the CC ever again. I can't reduce my living expenses though. I work in Tysons, so I need a 2 bedroom in an area commutable there. These are my major costs:
-My rent currently is $1600. I don't think I can reduce that unless I live way out and then I would have to pay more in gas, tolls ect, so is it even worth it? -Daycare: 1300 -Cellphone: $70 -Internet & Cable: $75 ( its basic cable, cheapest I could find) -Car Ins: $150 ( i have 3 accidents) -Car Payment: $350 -Credit Cards: about $400/month -Utilities: $250 -Gas:$200 -Food: Varies So these are my main expenses. Thanks |
Anonymous
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Options for saving money:
How old is your DC? As a preschooler, s/he and you could share a room for a few years so you could get into a one bedroom. It or probably too late now, but your car payment seems high. What is your loan term? Food shouldn't vary. You should set an amount in your budget for food and stick to it. if you leave it as an open item it is more likely that you will waste $$ on take out/order in or impulse buy instead of just looking in your kitchen and creating a meal from what you already have. |
Anonymous
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DC is 4, I could probably squeeze into a 1 bedroom but I live 15 minutes from work, I got a deal on the 2 bedroom, just checked craigslist and 1bedrooms in the area go for $1550-1600… You're right I should have a food budget, never really thought about it, since i usually just buy food when we need it. How much should i budget for food for 1 adult+1child?
The loan rate is 3.3%, the payment is high because i wanted to pay it off quickly... |
Anonymous
Good for you on the overpayments on the car! Food budget??? I'm going to guess $50/week if you buy meat in bulk and freeze portions. See if there's an ALDI near you. Cook your dinners, bring your lunches. There have been some good threads on here on food budgets that you can check out for meal plan ideas. |