Old 401k -cash out or keep? WWYD?

[_ktg_]

I have a 401k account with a previous employer, it has a pretty good balance of about $7500 currently and its gaining more now each qtr as the economy recovers slowly.

Now this year - DH & I have started to get our debts paid down and loosely work the DR system. We have approximately 26k in debt between a student loan and various CC balances. We are weighing it out if it is worth it to just cash this out, and use the remaining balance (mostly like $2750) toward one of our CC balances or to keep it and watch it grow.

One of the main reasons we are thinking of cashing out, is my current employer has a mandatory enrollment plan (403b) of 8% (the college matches 6%) once you have been with them for 2 years, and that will start for me in May. Currently I am at the same salary since starting and haven't even received a COL increase due to the economy this year, in the meantime my insurance costs and other benefits have increased again this year, so combined with this hit to my paycheck, I'll have taken almost a 12% reduction in pay which is tough as DH is a SAHD.

What would you do?

[A&A]

I'd cash it, personally.

[annethcz]

What are your interest rates? How much are you able to pay towards your debt currently? Have you done the calculations to see how long it will take you to pay off your debts without cashing out the 401K?

I just can't see how throwing away nearly $5K in penalties and fees is worth paying off 10% of your debt. Is paying of $2750 going to save you $4750 in interest on the other debts? If not, you're losing money- and that doesn't even take into consideration any future earnings you're missing out on.

[dawningmama]

Can you take out a loan with it instead of cashing it out? I know most times you need to be still employed with the company to take the loan, but it's worth looking into. The nearly $5k loss is big. Can you not roll it into the 403b, though, and then take a loan? I take loans from my tsp (fed gov't for 401K) now and again and it works out because I'm just paying myself the interest and I continue to contribute so I don't lose too much ground. (In fact, it worked out that I probably got ahead last year because I paid myself more interest than the market made what was left in my TSP.)

[desertgirl01]

A few years ago my husband cashed out his old 401K--an amount close to what you're talking about. We bought a few things we needed, like a new swap cooler, and paid off a credit card, but the gain was not worth the loss. And of course, we eventually forgot about the penalty for early withdrawl, so tax time hurt!

I would roll the money over to something like a Roth IRA, and just let it grow till your golden years.

[_ktg_]

Originally Posted by annethcz

What are your interest rates? How much are you able to pay towards your debt currently? Have you done the calculations to see how long it will take you to pay off your debts without cashing out the 401K?

I just can't see how throwing away nearly $5K in penalties and fees is worth paying off 10% of your debt. Is paying of $2750 going to save you $4750 in interest on the other debts? If not, you're losing money- and that doesn't even take into consideration any future earnings you're missing out on.

This is a great point, which both DH & I hadn't considered. Right now we have his "student" loan which is at 10%. I use the word student loosely as its not really one, but more of a personal use loan from a bank. Its evil. The other rates are 1 CC at 0% until October 2010 & then another at 4.9% until the life of the balance is paid off.

Originally Posted by dawningmama

Can you take out a loan with it instead of cashing it out? I know most times you need to be still employed with the company to take the loan, but it's worth looking into. The nearly $5k loss is big. Can you not roll it into the 403b, though, and then take a loan? I take loans from my tsp (fed gov't for 401K) now and again and it works out because I'm just paying myself the interest and I continue to contribute so I don't lose too much ground. (In fact, it worked out that I probably got ahead last year because I paid myself more interest than the market made what was left in my TSP.)

If I was still employed with that company, I would consider a loan against my 401k, but that's not a possibility anymore. I'm against rolling it over into my new 403b, as that money would be subjected to the vesting policies of that account and I have the potiential to lose my money there if I leave this position before I'm fully vested with that account. The loss from this is huge, mostly because we had moved from WA (no state income tax) to WI last year and now we face not only federal taxes but the same from state taxes too.

[_ktg_]

Originally Posted by desertgirl01

A few years ago my husband cashed out his old 401K--an amount close to what you're talking about. We bought a few things we needed, like a new swap cooler, and paid off a credit card, but the gain was not worth the loss. And of course, we eventually forgot about the penalty for early withdrawl, so tax time hurt!
I would roll the money over to something like a Roth IRA, and just let it grow till your golden years.

This is what terrifies me about cashing out this account, forgetting about the taxes, then I'd just be in the hole again to a different creditor (the gov't).

[cschick]

Originally Posted by _ktg_

This is what terrifies me about cashing out this account, forgetting about the taxes, then I'd just be in the hole again to a different creditor (the gov't).

If you do this, don't wait until the end of the year to pay the taxes on it. Make estimated quarterly tax payments for that year, or adjust your withholding at work so that you're paying more income tax per pay period. (You can file a new W-4 and ask that a specific additional amount be withheld per pay period.)

In fact, you SHOULD do this any time you expect that you're going to have significant taxes to pay on April 15th. Once what you have to pay to the IRS goes over a certain limit, there may be an additional penalty for holding onto that money until you file your annual taxes.

[mnnice]

I think you money is doing more good in your 401k than it would towards your debt. Your are going to spend $5000 to get $2600 (which is only 10% of your total debt and unlikely to really improve your overall cash flow much). I find it hard to believe it's going to speed up the time it takes to get out of debt much or improve your quality of life any.

[Mama J Rock]

Aren't the vesting policies only related to what the employer matches? I think what you put into your account is 100% vested at the time of contribution, it's just what the employer puts in that is subject to a vesting schedule.

[Amys1st]

I hate to be harsh, but I will be honest. Roll the whole amount into a IRA. Its a very small amount and once you get yourself out of this trouble you got yourself into, you roll it into a Roth IRA so you pay taxes on the small amount instead of in several years when you pay taxes on a higher amount since it will grow and no doubt you might be in a different tax bracket which can cause you to pay even higher taxes.

Anyone considering throwing away 5K to pay off with 2K needs to rethink what your spending and saving habits are and get yourself back on track. this thinking is what got you in this spot. Sorry.

[Mosaic]

Originally Posted by Mama J Rock

Aren't the vesting policies only related to what the employer matches? I think what you put into your account is 100% vested at the time of contribution, it's just what the employer puts in that is subject to a vesting schedule.

Agreed... what you contribute is automatically yours 100%.

Originally Posted by annethcz

I just can't see how throwing away nearly $5K in penalties and fees is worth paying off 10% of your debt.

Agreed... I understand it's tempting, but it's really not worth it. And honestly, though the market has rebounded somewhat, it certainly hasn't made up all of the distance it lost in the last couple of years. Taking it out now would be taking that hit on top of the penalties, taxes, etc. Roll it over and let it grow. Technically the inflation rate for this past year has been predominantly negative (our CEO quoted -0.2%, but I'm not sure where that number came from), so your money was worth more this year than it was last.

[_ktg_]

Originally Posted by Amys1st

I hate to be harsh, but I will be honest. Roll the whole amount into a IRA. Its a very small amount and once you get yourself out of this trouble you got yourself into, you roll it into a Roth IRA so you pay taxes on the small amount instead of in several years when you pay taxes on a higher amount since it will grow and no doubt you might be in a different tax bracket which can cause you to pay even higher taxes.

Anyone considering throwing away 5K to pay off with 2K needs to rethink what your spending and saving habits are and get yourself back on track. this thinking is what got you in this spot. Sorry.

Not taken as harsh in anyway! I put this question out there as I like said in my OP, DH & I are considering what to do with this account - our thoughts are cash out, roll into an IRA, roll into 403b account with new company, or status quo & leave it as is for awhile. I'm open to all feedback.

Originally Posted by Mosaic

Agreed... I understand it's tempting, but it's really not worth it. And honestly, though the market has rebounded somewhat, it certainly hasn't made up all of the distance it lost in the last couple of years. Taking it out now would be taking that hit on top of the penalties, taxes, etc. Roll it over and let it grow. Technically the inflation rate for this past year has been predominantly negative (our CEO quoted -0.2%, but I'm not sure where that number came from), so your money was worth more this year than it was last.

I agree it is tempting, hence this question! We weren't planning on doing anything until 2010 with this account anyways, so our first step is to see what we're getting back with our 2009 return. Thank you!

[lmonter]

Just keep in mind that if you cash it out, you're only going to see maybe half it, possibly less. Early penalty withdrawal, higher taxes on it, etc. I cashed out a 401K many moons ago (only had like $2500 in it between my contributions and vested amounts, I got $1100 after taxes and penalties) to pay off hospital bills from my oldest. Should've rolled it over and just let it keep growing. Oh well.
There aren't any loans for retirement or to boost a savings account, that's one thing I'd suggest keeping in mind. Things may suck right now (trust me, it's been a rough year here, too), but thinking 10-50 years ahead and planning accordingly could save your bacon so to speak. Which is why we have not touched our stocks or hubby's 401k (although since he's no longer working there we need to roll it over into something else).

[spedteacher30]

I've got an old 403b from when I was teaching that has a balance of about $10K in it. I'm just leaving it alone indefinitely. I also have a small pension that I will ultimately collect from the state when I retire. Both of them will be tiny in comparison to my current 401K, but I can't imagine cashing either one out--even now that we are in pretty rough financial shape

As others have said, the tax penalties are just not worth it.