Withdrawal from 401(k)

I am a 35-year old employee of a private firm. I recently took up a new job and with my earlier employer I had a 401(k), in which I have been stashing my savings for the past 8 years. I also have a credit card debt of $15,000 which I intend to pay off and reduce my burden. Is it a good idea to cash out my 401(k) to pay off this high-interest loan? ~ Amanda Miles, College Park, MD

 

Hi Amanda, it certainly is a good idea to pay off your high-interest loans that eat into your savings. But should you use your 401(k) savings to do that? Should you take a part of your retirement savings to pay off your current debts? Let’s see.

 

As you are switching jobs, cashing out all or part of your 401(k) savings should not be a problem. But if you were with the same employer, you cannot withdraw funds unless it was for an emergency, like medical treatment. Even then, you may only be able to withdraw your elective-deferred contributions, as the amount your employer has contributed is purely for your retirement.

 

As you are 35 years old, you still have 30 more years for retirement, considering you work till the retirement age. At http://www.401keasy.com/, we tell our clients to ask themselves these questions before considering 401(k) withdrawal.

 

  1. How much retirement balance do you have in your 401(k) at the time of cash out?
  2. Will your income remain the same or increase with this new job?
  3. Do you have enough in the 401(k) for your needs? Or will you barely be able to pay the bills?

 

I you do not plan on working for long and if there is a decline in your overall income, cashing out your retirement income may not be a good idea.

 

If you owe the card company $15,000, you will have to withdraw $18750 from your retirement savings, because you will also have to account for the 25% that you need to cover the early withdrawal penalty and taxes. Of the 25 percent, 10% is for penalties and the rest, assuming you fall in the lowest tax bracket of 15%, is for taxes you will be paying on the money withdrawn.

 

At http://www.401keasy.com/, we believe that a better alternative to cashing out is a 401(k) loan which attracts an interest of around 5%, which is way less than the 20 percent you pay on credit card debt. In this case, a 401(k) loan to pay off debts is good as long as you don’t create more debts and you have enough time to save and make up for money withdrawn from your retirement savings.

About Elliot Earl, Director, Pension Trade Association
Director, Pension Trade Association Founded in 1982, the Pension Trade Association [California Domestic Nonprofit Corporation #C1629080] is dedicated to helping workers save for their retirement through expanded coverage of 401k -type defined contribution pension plans.

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