Cashing in 401k to pay off debts

Discussion in 'Credit Talk' started by mleichtle, Sep 10, 2003.

  1. mleichtle

    mleichtle Member

    Hi, I'm a newbie here. From cheesy Wisconsin, and I'm sick of paying bills for nothing. Now I ask the great forum for your infinate wisdom and knowlege.

    Here's the skinny;
    I make about $400/wk after tax. Wife is stayhome mom, trying to start day care buisness. She quit her job 2 yars ago but still has a 401k there.
    Credit cads;
    fnanb $3500 19.9% current
    Sears $1300 19.9% current
    Student loan $4000 6% ahead
    Direct merchant $6000 29.9 PERCENT 12 DAYS LATE THEY'RE ALEADY CALLING 3 TIMES A DAY!

    We live on the cheep side, even qualify for a welfare program for the baby (wic), but can't seem to come up with more than the minimum payments each month. our two cars are getting old and we'll need a new (used) one pretty soon.
    DMB closed my account but I still owe, If I could get rid of it I could easily take care of the rest. My plan is to cash in the 401k (since she's no longer working) and pay it off. We think we can get $8000 from it after the tax hit and all. Then come back here and start working on our credit scores and Int. rates. We havent had a late payment in about 2 or 3 years.

    Any thoughts appreciated.
  2. DanS

    DanS Well-Known Member

    See if you can swing a loan against the 401k. If you can't do one now, find a bank or credit union you can transfer the 401k to that will give you a loan against the IRA.

    Then take out whatever you can, pay off the highest interest loans and pay the lower interest rate loan back. Ideally, that bank will report on your new loan and that will help your credit report.
  3. Hedwig

    Hedwig Well-Known Member

    Don't cash the 401(K). That's your retirement. The more money you put in at an early age, the better. Read Butch's thread on the Rule of 72. You lose a lot of doubling time if you pull this out, not to mention the taxes you pay.

    It's possible that it will put your "income" above the limit for wic, since it would have to be included in ordinary income.

    Can you get a second job, even at a 7-11 or something, and use the money (every penny) toward the DMB? Of course, that could put you above the income limit for wic as well. But it would be preferable to taking out of the 401(K).

    Can you borrow from a family member? If you pay them back at the same amount, but a lower interest rate, you'll still come out ahead, and you won't be getting phone calls. Even better, can you borrow from a family member and wait a year to start repaying? Then you can get some of the other bills paid off first.
  4. iambroke

    iambroke Well-Known Member

    I wouldn't cash in the 401K as you'll pay 20% taxes on it right off the bat PLUS a 10% early withdrawal penalty that you'll have to put on your taxes.

    It isn't worth it and it's supposed to be used for retirement. That is why they charge fees or whatnot when you take money out.

    And I would not take a loan against it. That to me is just shuffling debt from one thing to the other. It won't make any difference and you'll lose the compounding you'll get from keeping the money in the 401K

    I would sit down with the wife, make out a budget (get rid of the wants and soley keep the needs).
    Turn off the cable/satellite TV, the cell phones, the high speed internet, etc...Focus on the highest interest rate loan/debt and pay that off as fast as possible.

    Get a 2nd job delivering pizza or at a convenience store, etc...use that paycheck to apply towards the debt.

    Sell a car if possible and keep one since wife is home with the kids. Don't know how feasible that is but you may get some money off that to pay down a debt. DO NOT take on my debt (new car or used car!) as that won't help you. Cars can be driven for years and years. Who cares what they look like as long as they get your from point A to point B.

    Try looking here:

    and go to the money management area and then the financial calculators. There is a good debt reduction calculator on there that if you input all your debts it will tell you what to pay first and make out a plan for you and it's all free!

    I wish you the best!
  5. Hedwig

    Hedwig Well-Known Member

    I agree with iambroke about the wants and needs. Although you may WANT a lot of things, you probably don't NEED them.

    One of the first things I canceled when I started having trouble was the cable. I can't get broadcast TV, I live too far out and in a valley. So I have no live TV. I have a friend who tapes a few shows, I can watch them when I want and "blast" the commercials. Other than that, it's DVDs.

    I used the time that I would have watched TV for a third job (which was a consultant job, working at home) with the RADIO on for background.

    To this day, I've never reinstated the cable. I can get the news on the radio. All of the time that would be spent on TV can be put toward something useful.

    While I may have missed TV at first, now I don't miss it a bit. I traveled for my job for several years, spent many hours in a hotel room, and usually couldn't even have told you if the TV worked. I don't miss it at all.

    And I've driven more than one car in excess of 200,000 miles. Especially if you live near where you work, an old car is acceptable. The repairs are usually still less than the payments. Remember, you have to do maintenance whether the car is new or old, so only count actual repairs, not things like oil changes.

    Your children don't need the latest and greatest of everything. You need to teach them the value of money and how you have to save for what you really want. They'll be much better off when they get older.

    In other words, find some ways to save money. If you eat out, stop doing that and put the money towards your bills. Find any other place that you can economize. Shop at discount stores.

    Put all of your extra money toward paying off bills, highest interest rate first, then on to the next, adding in the amount you paid on what was paid off. You can get this licked without killing your retirement.
  6. iambroke

    iambroke Well-Known Member

    Things You Donâ??t Have to Pay For:

    1. Storage lockers. Youâ??ve got too much stuff. Sell something and make room at home.
    2. Health club membership. Walk somewhere.
    3. Cable, especially the premium stuff. Remember bunny ears?
    4. Cigarettes. Theyâ??re really expensive.
    5. Cell phones.
    6. A home phone if you pay less for a cell phone.
    7. Telephone extras.
    8. A second phone line for the computer. Callwave is cheap and works fine.
    9. A checking account. Find a free one.
    10. Extended warranties. Theyâ??re overpriced and seldom used.
    11. Insurance you donâ??t need. If youâ??ve got no dependents, you donâ??t need life or accidental death insurance.
    12. Internet. Free at the library
    13. Magazine subscriptions. Free at the library.
    14. Video rentals. Free at the library.
    15. Trash removal. DIY.
    16. Lawn service. DIY.
    17. Soda. Water is better for you and free.
    18. Pets. Get one from the shelter. It saves a life and discourages puppy mills.
    19. Pets. No pets means no pet expenses.
    20. Batteries for the remote. What else are kids good for?
    21. Gas logs. Might as well burn money.
    22. Ice. Fill jugs and bags with water and freeze them.
    23. An extra car. Car rentals are $20-30 per day and are cheaper than keeping an extra car.

    Things You Could Pay Less For:


    1. Internet shopping. Always check eBay before buying anything small in size. Example - computer printer cable: $25 in store; $5-$7 on eBay after shipping.
    2. Internet shopping. Do price comparisons online. Check,, for the best deals.
    3. Internet shopping. Check for coupons for online retailers at,, and
    4. If itâ??s non-perishable and on sale, buy it in bulk.
    5. Itâ??s probably cheaper at the dollar store.
    6. Buy used. A used CD sounds as good as a new one.
    7. Yard sales can yield great deals, especially the ones in wealthy areas.
    8. Layaway still isnâ??t a bad idea if you canâ??t pay for it all now.
    9. Postage. Use media mail over 1st class priority for printed material and CD's.
    10. Postage. You can generally buy US postage from stamp dealers below face on E-bay and through certain dealers. See Linn's Stamp News.
    11. Postage. Pay bills online and save a stamp.
    12. Paper towels. Use dishtowels. Theyâ??re reusable.
    13. Dishtowels. Use shop towels.
    14. Shop towels. Use old clothes rags.
    15. Dry-cleaning. Try Dryel.
    16. Reuse freezer bags if theyâ??re not yucky.
    17. Services. Trade services with a neighbor
    18. If the library doesnâ??t have your favorite magazine, donate a subscription to them and tax a tax deduction.
    19. Internet. Try $5.95 per month. And it works fine. NetZero and Juno are still free for 10hrs per month each.
    20. Library. If your library doesnâ??t have it check those at a college, nearby towns
    21. High schools can be a source of free labor for all sorts of things if they have any â??tradeâ? classes, like welding, construction, agriculture, cosmetology, woodworking, etc. Check it out.


    22. Run a car until the wheels fall off.
    23. Always have a used car inspected by a certified mechanic.
    24. Avoid popular models - you will pay more.
    25. Buy a used car - 4-5 years old. What you save will easily cover repairs.
    26. Buy cars that are in the last 2-3 years of production. Generally, the bugs in the model are worked out and the buyers are tired of them.
    27. Car rentals are $20-30 per day and are cheaper than keeping an extra car.
    28. Car rentals are more economical on long trips over a short period of time. I.e., it is cheaper to rent a car to drive 1000 miles over a long weekend than to use your own vehicle.
    29. Never lease - it is usually not a good deal.
    30. Public transportation can be cheaper, but not always.
    31. Walking is cheaper than driving on short distances.
    32. Buy gas at the coolest parts of the day â?? itâ??s more condensed so you get more gas for your buck.
    33. If you have an old junker, your local high school transportation department can use it to learn on and may fix it up for you for free.

    Beauty and Clothes,

    34. As men's fashions rarely change, buy in bulk when you find a bargain.
    35. Burlington Brands (not the Coat Factory) and JC Penney's outlet are the best stores for cheap bargains.
    36. Goodwill is one of the best sources for designer women's clothing ... and unworn men's shoes. Most of the women's clothing has not been worn.
    37. Goodwill has a "frequent shoppers" program.
    38. Shop for winter and summer clothes at the end of the season.
    39. Try thrift stores, it's kinda fun.
    40. Yard sales are a great source of kidsâ?? clothes.
    41. Learn how to mend.
    42. Look for REAL outlet stores - that is where the real bargains reside!
    43. Running shoes. Last yearâ??s style could save you 50%.
    44. Check out cosmetology schools for cheap haircuts. The teacher is standing right there to make sure you don't end up with a mohawk. Not the best cut in the world but for $1 . . .


    45. HS sophomores and juniors can generally take summer classes at universities, sometimes for free. It gives you a head start when you get to the university.
    46. In some states (like Ohio), your HS Senior can attend the local public university at the local school district's expense. The LSDs do not advertise this.
    47. Scholarships - often there for the asking.
    48. You are paying the professor's salary. Make sure that you have access to them.


    49. Cultural events at colleges and universities are cheap.
    50. Use the city parks - you are paying for them.
    51. HS and small college sports are GREAT deals
    52. Go to the matinee instead of the night movies.
    53. Check out the minor league games.
    54. Most major university sporting events are FREE or very cheap (except for college football and basketball).
    55. If you go to a movie rental place that guarantees the movie is in stock, check ALL the movies to see if any arenâ??t in. If itâ??s not, you can get a rain check for it. You may not be willing to spend money to rent it, but what if itâ??s free?
    56. See if thereâ??s a dollar theatre in your area.

    Food and Groceries,

    57. Generic wonâ??t kill you.
    58. Cook from scratch.
    59. Eliminate convenience food. You can make gallons of soup for the cost of a couple of cans.
    60. Find non-union grocery stores - they are a lot cheaper.
    61. Freeze and can fresh vegetables when they are in season.
    62. Gardening is cheaper - and good exercise.
    63. Shop Farmer's markets at the end of the day when they are ready to go home.
    64. Use reusable water bottles filled with tap water instead of buying water.
    65. Brew your own beer.
    66. Premium beer. Is it that much better?
    67. Cat litter. The cat wonâ??t care. Check out the feed store for bulk prices.
    68. Dinner. If youâ??re desperate to eat out, make dinner, take it outside and have a picnic.
    69. Lunch. Brown bag it.
    70. Buy meat in bulk and freeze it in smaller packages.
    71. Less tender cuts of meat are cheaper, can be cooked longer and have more flavor.
    72. Buy soda at the store, not from the machine at work.
    73. Generic soda wonâ??t kill you.
    74. Always look at price per oz when comparing items.
    75. Shop at ALDI if possible. Not much variety, but super cheap.
    76. Real dishes keep you from having to buy paper plates.

    Home Décor, Landscaping, Furnishings and Appliances,

    77. Make your own curtains.
    78. Shop for second hand home furnishings. A year-old couch costs 20% of a new one.
    79. If you need a new appliance, check for scratch and dent stores. A few scratches can mean half-price.
    80. Check your high school art department for leftover thingamabobs that kids made and forgot to pick up. It won't always look the best but it always adds "character" to an outside area.
    81. Check if your high school has an agriculture dept. By developing a relationship with the ag teacher, sometimes you can get a "trade agreement" whereby you provide some plant clippings the students need and you can get plants/clippings of something you need.
  7. Hedwig

    Hedwig Well-Known Member

    Great post, iambroke!!

    I haven't done all of these, but believe me, I've done a lot at one time or another.

    When you grow up poor and on a farm, you learn the value of a dollar. Wear hand-me downs, whether you like it or not.

    We always had a garden and froze vegetables for winter. We also bought fruits in bulk in the summer (a couple of bushels of peaches, for example) and canned or froze them. I stayed up all night more than once canning peaches or freezing corn.

    My father also got beef and pork as part of his compensation, so we ate steak a lot. I remember feeling deprived because other kids got to eat turkey on Thanksgiving and we had to have steak!
  8. iambroke

    iambroke Well-Known Member

    (a couple of bushels of peaches, for example)

  9. Hedwig

    Hedwig Well-Known Member

    Yes, I love peaches too. But you can't get very good ones in the stores. They're picked when they're green, and they'll rot before they ripen. To get really good peaches, you have to go to the orchard or a farmer's market.

    Know how to tell if a peach is ripe (after you've paid for it, unfortunately)? You peel it by pulling the skin. If it's ripe, the skin will come off in one (or maybe two) pieces. If only little chunks pull off, or if you have to use a knife to peel it, it isn't really ripe.

    Amazing what we country folk learn, isn't it?
  10. lbrown59

    lbrown59 Well-Known Member

    My plan is to cash in the 401k (since she's no longer working) and pay it off. We think we can get $8000 from it after the tax hit and all. Then come back here a
    How much are you willing to pay to get the $8000 25 50 75 thousand Etc.?

    THE END ** *** ** LB 59
  11. mleichtle

    mleichtle Member

    Thanks for your replys. I understand what your saying. but since she doen't add to it any more, and I can't roll it into my 401k (I have one now and my carreer is just starting to take off). At retirement it won't have that much of an impact. We've been living below the means for a few years, doing just about everything on your list, iambroke. I'm thinking about our safty, If somthing happens while were this much in debt, with no equity type things, were screwed for a long time. I need to cover our behinds as soon as possible. Chalk it up as a learning expierence and start over with the rule of 72 working for us instead of against us.

    I don't know where i get these Ideas, I could get rich by growing peaches. I here theres a market.
  12. Hedwig

    Hedwig Well-Known Member

    Because there's not a lot of money and she's not adding to it is no reason to cash it in. In fact, putting the money in early and leaving it is better than putting it in later.

    Here's an interesting article to put it in perspective. Do you want to save for 8 years or 40 years? I think there are a lot of us here who are on the 40-year track. That's why I keep trying to stress the importance of saving when you're young. Find some ways to do it. And her account is tax-deferred, better than putting the money back later in a taxable account.

    Here's the link:
  13. mleichtle

    mleichtle Member

    O.K.... That really throws a wrench into my whole game plan.

    If we borrowed against it would we lose the intrest the same as if we withdrew the money?
  14. lbrown59

    lbrown59 Well-Known Member

    At retirement it won't have that much of an impact.
    Don't bet on it!
    THE END ** *** ** LB 59
  15. lbrown59

    lbrown59 Well-Known Member

    1*Because there's not a lot of money and she's not adding to it is no reason to cash it in.
    2*In fact, putting the money in early and leaving it is better than putting it in later.
    2*I'll buy that. In fact I did that very thing 19 years ago.
    Socked away $12000 in one lump sum in 1984.
    How much is that $12000 worth today at?

    mleichtle :
    Would you be willing to trade me the $8000 in the 401K for what I have in my fund now?

  16. mleichtle

    mleichtle Member

    O.K. What meant is, If we leave it alone and borrow against it to consolidate at a lower rate, do we lose the intrest for the next two years until its paid back? because the principle is locked up as collateral?
  17. rackt3

    rackt3 Well-Known Member

    To add to the advice you've gotten here so far about saving money instead of drawing from your 401K, here's something else.

    Determine how much you have you can afford to pay each of those items (above the minimum). Take anything you have over the minimum, and put it towards the debt that's at 29% interest.

    If you still can't get it to go down and your last resort is to draw from a 401k, then I'd consider (if you're in school) a school loan. They're low interest, and deferred, so you can at least use that to pay down to really high interest rate loans.

    Again, try to find other means to get money to pay down down this debt...pulling from your 401k is almost always a bad idea. As always, concetrate all the extras on the higest rate first rather than paying the same amount to all of them.
  18. ginger2

    ginger2 Well-Known Member

    dAMN < lBROWN, YOU HAVE SOMETHING TO SAY BUT NEVER SPIT IT OUT! I am listening but you must make it simpler. We are not all experts, spell it out. You have knowledge but don't give a real answer, just a sarcastic one. aND NO, i AM NOT A NEWBIE,have followed your posts for some time now.
  19. pd11604

    pd11604 Well-Known Member

    Re: Re: Cashing in 401k to pay off debts

    At my company the interest payments on 401k loans are considered an "asset" or "investment" of the fund, so in effect when you repay the loan you are paying yourself back plus interest

    BUT right now the interest rate on 401k loan is about 5%, while $$ left in the account could be earning 10% or more depending on the stock markets

    SO you'll make some money on the $8000 definitely won't lose any, but won't make a lot on it either
  20. lbrown59

    lbrown59 Well-Known Member

    11. Insurance you donâ??t need. If youâ??ve got no dependents,
    12*you donâ??t need life or accidental death insurance.
    15* Trash removal. DIY.
    22. Run a car until the wheels fall off.
    12*No body should ever buy accidental death insurance.
    15*Can't do that in a lot of places because it's illegal for an individual to transport trash over city streets.It's also illegal not to be signed up with the garbage company dictated by the city.In my town every body on city water is required be signed up with that company.
    22*I just Did that. Took me 12 years to do it though.
    THE END ** *** ** LB 59

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