401K question

[Apelila]

So I found out today a 401k I had through my old job has is holding a value close to 10k at the moment. I'd forgotten about the damn thing until I found a letter from them while cleaning out my storage unit.

Right now I'm underwater on debts. Come February I'll have a huge burden taken off me and be able to catch up to the minimum payment on my loans within 3 months, within a year I'll be much more stable. It's a long story. Short version: I'm stuck with an apartment my ex dumped on me and its costing an extra 600$ a month. Breaking the lease is more expensive than waiting for it to end, and why that is true is the long story part. Just take it that it is.

Right now, between here and then I'm not certain what's going to happen. I've called the loan companies asking for a deferment. I haven't been able to pay anything on 2 of them since May.

Now the point: I know taking anything out of a 401k has a huge penalty. Even assuming a 50% penalty would allow me not only to catch up on my student loans, but to outright kill the 2 of them I have been paying on and to use that payment towards the one's I haven't been able to pay.

Assuming that my request for clemency is denied, is it a dumb fucking move to take everything out to get caught up? I don't really have anyone else to turn to, and working more isn't really and option because the stress would eviscerate my health.

[Tweek]

is it a dumb fucking move to take everything out to get caught up?

Yes, hopefully your credit isn't being affected though, if it has then it might be too late to worry about that.

You can claim an emergency one time I believe to take out some of your money without a huge penalty a friend of mine did it saying his grandmother was dying in India or something along those lines but I really wouldn't recommend it.

[Brill Weave]

I wouldn't do it. You're talking about your future nest egg.

[Apelila]

Credit is already fucked from other things. I have lots of old, small debts to settle; they're not as important as the loans not going into default.

401k hasn't had anything put into it since before the recession. With my current goals, it helping me ahead 6 months would be better than keeping it, I would be able to pay off loans faster and save nearly as much in interests.

[Soa]

If you know you will be fine in a year I wouldn't do it.

The penalties for cashing it out are huge. I think 20% up front, plus you have to add the money you take out to your income, which means you'll owe money on that. You could probably take out a hardship loan if need be, but in your situation I would just ride it out. You should be granted a deferment on your student loans, and even if you don't they generally are easy to work with on setting up workable payment options.

My father in law cashed his 401k out about 5 years ago, and I thought he was nuts for doing it, but he ended up using it to pay off his house and remaining credit card debt and is in way better financial shape than before.

[Apelila]

Thing is I don't know that I will be fine in a year. Gotta wait and find out about the forbearance first.

This is a backup plan for all the backup plans if anything, I'm trying to make sure that come the worst possible outcome I don't default on the student loans; I want to go back to school in the near future.

[RKenshin]

Just to reiterate: If not approved for an exception in economic hardship, which is tough to do, you will pay a 10% penalty in addition to owing taxes on the amount you withdraw (it will be counted as income).

Not to mention that it can be incredibly difficult to make up for. If you cashed out the full $10k, you're not only tossing out the years it took you to save up that much but also the years it would take you to rebuild it to that level. Most people don't have the flexibility to allow for large 401k contributions that could quickly make up the difference.

So yeah, it should definitely be a last resort.

For your specific situation, I don't think you should risk it. If you still had a credit rating you wanted to salvage, I may say differently, but if thats already gone to shit then you might as well hold out to see if things do end up improving over the next year.

[Dolmen]

There are numerous factors involved in the situation. Personally, I'm able to draw from my 401(k) without penalty, but I have to pay it back with interest (like taking a loan from yourself).

Generally, assume you'll owe your normal tax rate along with a 10% penalty for early distribution of funds. You can find more information here:
http://www.irs.gov/pub/irs-pdf/f5329.pdf

[Soa]

At the very least you should roll it over into an IRA so its making money.

I would be highly surprised if you can't get a forbearance on your student loans. Hell I got one even when I was still working a full time job, I just had to show them some pay stubs and copies of my bills before they approved it.

[Odesseiron]

While I agree with everyone on the board, I had a similar situation 2 years ago.

I was roughly 23k in debt. I had paid most of it off over the course of 2 years putting every penny I had towards it.

Then I was laid off. I still owed about 7k or so in debt looming over me, with only unemployment as income. I took out my 401k and used it towards paying off the entirety of my debt. True it was my nest egg, but being 27 or so at the time, I justified it saying I could replace it in a couple of years. Which now I have.

Getting debt free was probably one of the best feelings in the world. I now owe 2k maximum (minus a car note) and that to me is a lot of money owed. I'll never let it get that high again. So if you can replace the funds within a specific time frame, I say go for it. Being free and clear is a great feeling so long as you have no other bills that will pile up.

[Mjd]

It matters what kind of 401k you have. It's from your old job so I imagine you're not putting anything into it still.

I took out and didn't have to pay any penalties, but I still work for the same company. If I left I would have to keep paying it back till it was payed (taking a loan out on myself in a way)

If you're in serious debt do it, but plan out for the next year. Also don't forget shit does come up so try to have a back up plan too. (I have like 15k in saving bonds in a safe deposit box as a backup plan).