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2 Bumps

Is a 401K payoff worth the penalty?

I've been off work since January, and we're having some deep money issues as a result. I know I can resolve them if I take the money from my 401K, but I also know how ridiculously stupid that is. My question is, is it worth it to fix the short term issues and pay it back in the long run? I would probably lose $1500 in taxes. Hubby and I are both 35 so it's not like we're retiring for a while, but I also don't really want my car to be repossessed. Anyone else ever been here?


Asked by terirose22 at 1:29 PM on Jul. 8, 2011 in Money & Work

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Answers (7)
  • Well I guess the question is : Would it solve the porblem completely or just slow down the inevitable? If you are gong to take out the money to be int he same situation in few months you may as well put the money aside for something you CAN solve or for your retirement. Is there something you can cut back on? Have you talked to the car and any credit card companies you may be dealing with about any hardship programs they may offer. I have a chase card and they gave me a 2% rate lowering my payments to $16 a month. Have you looked at your auto insurance plan? We just lowered to car we drive the least to min coverage keeping the full coverage on the one we drive. Cut cable? Lower internet plan? (I know internet is almost a must these days for job searches!) Cut back on groceries using coupons and meals plans. Using less energy/water... ANY THING you can cut even $5 out of is going to help in the long run.

    Answer by But_Mommie at 1:38 PM on Jul. 8, 2011

  • No. I would never dip into my 401K.

    Answer by Ataemommy at 1:38 PM on Jul. 8, 2011

  • Do whatever you can to avoid using your 401K. Can you sell things? Babysit? Anything like that?

    Answer by tspillane at 1:45 PM on Jul. 8, 2011

  • It usually is NOT worth it. I cashed in a small 401k years ago to help pay off credit card debt. Not only did I lose a big chunk to federal taxes & penalties, I ended up owing on my state taxes because of the bump in my income. If you've already cut back to the bone and there is no other way you could do it, but it can end up causing different problems in the end.

    Answer by katiemomNY at 1:56 PM on Jul. 8, 2011

  • We are already bare bones...we only have one car between the two of us, pared down on cable, got our student loans on forbearance, and got rid of our landline. I will see if there are any hardship programs that might help with the other stuff, but none of those things are going to make enough of a difference so that I could make my car payment while I'm on unemployment. If I took the money out, I would catch it up and pay it ahead, so that we would have a few months to get back on our feet.

    Comment by terirose22 (original poster) at 2:03 PM on Jul. 8, 2011

  • I personally wouldn't do it. Say you have $10,000 sitting there in your 401k. Are you willing to just GIVE the gov't 35% of it? That's $3500! When you cash it out, your company will withhold 25% right off for normal taxes. When you do your income taxes next year you'll pay another 10% penalty on it.

    If it's going to be enough money to completely pay off your car, maybe I would do it. If it's only going to catch you up for a couple of months and then you'll lose the car anyways because you still can't pay, I wouldn't.

    Answer by slw123 at 2:41 PM on Jul. 8, 2011

  • My dh was out of work for 10 months. Our house went into forclosure, my car was constantly on the verge of repossession. I took a hardship withdraw from my 401k to try to keep my house from getting forclosed on. That is the only situation I would recommend it. I only took $1800 so my taxes and penalties were only a few hundred. If your talking about a fairly small amount like that, it is probably ok. If your talking thousands in taxes, i wouldn't. Remember you will pay taxes, plus a penalty. My check was taxed when i got it, about $200, then it made a couple hundred dollar difference when i filed my taxes. If you can take a small amount just to keep it from repo, go ahead. But like someone else said, if that is only delaying the inevitable don't do it.


    Answer by Trinity001 at 11:32 PM on Jul. 8, 2011