topic Re: 401k withdrawal in Personal Finance

401k withdrawal

soxfaininfl — Sat, 12 Jun 2021 22:13:25 GMT

Hi Everyone,

I have about 35k in credit card debt. My wife lost her job due to the pandemic and was unemployed for a year. I have 12,500 in my 401(k) with Fidelity. I would like to take a hardship withdrawal, but I don't qualify for any of the reasons that they offer. I also do you have a loan for 3,100. I would like to use that money to pay down my credit card debt and then I can begin the avalanche method to pay down the remaining credit card debt. Is there another way for me to get that money? Yes, I know I will have to pay taxes on that withdrawal. I heard that I can move the money to an IRA. If that is possible, do I have to pay existing loan that I have of $3,100? I'm only 45 years old. I don't want to get rid of my 401k. I want build it back up once I payoff my credit card debt. Any advice would be appreciated.

Re: 401k withdrawal

FinStar — Sat, 12 Jun 2021 22:27:07 GMT

Well, there's the tax penalty and early withdrawal penalty as well. If you currently have a loan against your existing Fidelity 401K, I would suggest speaking with their plan administrator to determine your options. Are you looking to withdraw a portion of your 401K or liquidate most (if not all) of your balance?

Re: 401k withdrawal

soxfaininfl — Sat, 12 Jun 2021 22:41:19 GMT

I can get the money to pay the existing loan off if I need to. I can borrow from my family member and pay them back when I get my 401(k) money. Yes, I wanted to take most of what's there. I need some breathing room to pay off my existing debt. If I need to leave some money in there, so it doesn't get closed I will.

Re: 401k withdrawal

Anonymous — Sun, 13 Jun 2021 08:57:44 GMT

@soxfaininfl wrote:
Hi Everyone,

I have about 35k in credit card debt. My wife lost her job due to the pandemic and was unemployed for a year. I have 12,500 in my 401(k) with Fidelity. I would like to take a hardship withdrawal, but I don't qualify for any of the reasons that they offer. I also do you have a loan for 3,100. I would like to use that money to pay down my credit card debt and then I can begin the avalanche method to pay down the remaining credit card debt. Is there another way for me to get that money? Yes, I know I will have to pay taxes on that withdrawal. I heard that I can move the money to an IRA. If that is possible, do I have to pay existing loan that I have of $3,100? I'm only 45 years old. I don't want to get rid of my 401k. I want build it back up once I payoff my credit card debt. Any advice would be appreciated.

Don't do it. It is not worth it to touch your 401K. 401K is for when you retire. Depending on what type of 401K, you would have to pay tax penalties and income tax if you withdraw funds early.

Re: 401k withdrawal

Jordan23ww — Sun, 13 Jun 2021 14:36:13 GMT

I want to preface my statement by saying definitely do what you feel is best for you and your family. With that said I want to caution you against pulling from your 401K to pay credit card bills.

Years ago My wife and I had maxed out our 4 credit cards. I decided to withdraw from an old 401K from a previous job to pay down the balances. I took a big hit from the tax penalty immediately which I expected. What I didn't anticipate was the 2nd hit I would take when I filed our taxes the following year.

Every year we'd get a tax refund due to over payment which we're fine with. We usually would use that to cover a vacation or something we really wanted to buy. Keep in mind we weren't being responsible with credit cards and our money so this refund was often timely. Well after withdrawing from the 401K this became the first time in either of our lives that we owed at tax time. It really caught us off guard. We didn't realize that withdrawing that money that the IRS would hit us twice. Since we weren't expecting this it really threw a monkey wrench into our plans that year.

To make matters worse it became a slap in the face with the creditors. When I paid off one of my credit cards that had a $14,000 limit that was maxed out with the money from the 401K they immediately decreased my credit limit to $2500. That really stung because the options I contemplated before getting the money was I either could've paid 3 of our 4 cards down to $0 and then put a dent in the card with the $14000 limit or I could've just made a huge dent in the $14000 card and ignore the other 3 cards (1 was a store card so if an emergency came up it likely wouldn't help any). My thinking was if I pay down the $14000 card if an emergency rises up at least I'll have a lot of available credit to fall back on. I had chosen to pay down the $14000 card balance to $2000 and so they left me with only $500 available credit.

If that isn't bad enough, I paid down the balance but I didn't change my behavior. So before long my $2500 card was maxed out again and in time that card issuer increased my limit to $5500 and I maxed that out too. My other 3 cards were maxed out still so nothing had really changed. In hindsight I've always regretted my decision to use that 401K to pay down the credit card. If you decide to do so still I just hope you don't experience any of the downfalls we encountered! Best wishes to you and your family!

Re: 401k withdrawal

Horseshoez — Sun, 13 Jun 2021 14:25:58 GMT

@soxfaininfl, I'm pretty much in agreement with everyone else here, you gotta do what you gotta do, but yanking money from your 401(K) should be your absolute last option; the potential negatives are significant.

Re: 401k withdrawal

coldfusion — Sun, 13 Jun 2021 18:42:28 GMT

To touch on one question asked but I didn't see answered: If your 401K is through your current employer, your plan permits it (some do, most I believe don't), and you meet any and all mininum age and other requirements you may be able to execute what is known as an in-service rollover to an IRA.

I agree with everyone else that raiding your 401K really should only be done as a last resort and you would want to understand every one of the potential concenquences of doing so before you did it.

Re: 401k withdrawal

Anonymous — Sun, 13 Jun 2021 23:37:51 GMT

@coldfusion wrote:
To touch on one question asked but I didn't see answered: If your 401K is through your current employer, your plan permits it (some do, most I believe don't), and you meet any and all mininum age and other requirements you may be able to execute what is known as an in-service rollover to an IRA.

I agree with everyone else that raiding your 401K really should only be done as a last resort and you would want to understand every one of the potential concenquences of doing so before you did it.

While I generally agree with the party line: we are talking $12.5K at age 45. While better than 0, it's not a whole let better, so raiding it isn't going to imperil an otherwise comfortable retirement. You certainly don't want to pay the tax and penalties (which greatly reduce the amount that can be used to pay the cc debt) but it might be better than some other alternatives

Re: 401k withdrawal

BearsCubsOtters — Mon, 14 Jun 2021 00:48:36 GMT

Please please please do not touch your 401k. At 45, most people will want to have six figures in their 401k. Do you have a pension or any other retirement? If not, I say forget the credit card debt; you have to worry about your future and $12,500 is a very low balance for 35 let alone 45. Our generation cannot rely on Social Security. If you are having trouble paying or will become past due, I would recommend a Chapter 13 filing over taking a dime out of your 401k.

A lot of employers now are offering reduced fee or free consultations with financial planners, so it may be a good idea to look into if that is an option from your employer.

Anyway, best wishes to you and I hope it works out.

Re: 401k withdrawal

Horseshoez — Mon, 14 Jun 2021 01:51:43 GMT

@BearsCubsOtters wrote:
Please please please do not touch your 401k. At 45, most people will want to have six figures in their 401k. Do you have a pension or any other retirement? If not, I say forget the credit card debt; you have to worry about your future and $12,500 is a very low balance for 35 let alone 45. Our generation cannot rely on Social Security. If you are having trouble paying or will become past due, I would recommend a Chapter 13 filing over taking a dime out of your 401k.

A lot of employers now are offering reduced fee or free consultations with financial planners, so it may be a good idea to look into if that is an option from your employer.

Anyway, best wishes to you and I hope it works out.

You spoke a mouthful; when my wife and I were in our mid-50s she drained her 7-figure 401(K) to start her "dream" business; against my council, she way over-spent and after several months in operation, while the business was grossing eight to ten-thousand per month, we were still underwriting it to the tune of five-grand per month. Needless to say, trying to keep it afloat drained my realtively meager high five-figure Simple-IRA (I was self employed, she'd had a big-deal job with a Fortune-100 company).

Long story short, by the time we were in our late-50s we didn't have a single red cent in our retirement accounts. Had we filed for bankruptcy two years earlier at least some of our retirement funds would have been protected and we would have been much better off than we are now. The only good news here is I managed to land a job with a large financial institution which, among other services, sold 401(K) plan management to other companies; as a way of setting an example for their clients, their 401(K) plan for their employees paid a 4% core contribution into their funds, regardless of whether they contributed or not. In addition, they paid a 6% match; said another way, each employee contributing 6% of their income got an effective 10% match. Given I was over 50 when I took that job, I was able to contribut both the IRS maximum, but the catch-up contribution as well; in the last 8 years my 401(K) has recovered somewhat, but is still thin for a couple in their mid-60s. Yeah, we won't be retiring any time soon, I figure we'll be working until we're 72.

Re: 401k withdrawal

coldfusion — Mon, 14 Jun 2021 11:07:25 GMT

@Anonymous wrote:
@coldfusion wrote:
To touch on one question asked but I didn't see answered: If your 401K is through your current employer, your plan permits it (some do, most I believe don't), and you meet any and all mininum age and other requirements you may be able to execute what is known as an in-service rollover to an IRA.

I agree with everyone else that raiding your 401K really should only be done as a last resort and you would want to understand every one of the potential concenquences of doing so before you did it.

While I generally agree with the party line: we are talking $12.5K at age 45. While better than 0, it's not a whole let better, so raiding it isn't going to imperil an otherwise comfortable retirement. You certainly don't want to pay the tax and penalties (which greatly reduce the amount that can be used to pay the cc debt) but it might be better than some other alternatives

Even without factoring in the 10% penalty and the income tax due against the withdrawal it still only addresses a minority of the debt.

Besides, if the worst case senario were to unfortunately play out, assets that are in a 401K I believe generally remain protected through a BK. If the assets have been cashed out they are no longer protected.

Re: 401k withdrawal

Horseshoez — Mon, 14 Jun 2021 12:23:29 GMT

@coldfusion wrote:
@Anonymous wrote:
@coldfusion wrote:
To touch on one question asked but I didn't see answered: If your 401K is through your current employer, your plan permits it (some do, most I believe don't), and you meet any and all mininum age and other requirements you may be able to execute what is known as an in-service rollover to an IRA.

I agree with everyone else that raiding your 401K really should only be done as a last resort and you would want to understand every one of the potential concenquences of doing so before you did it.

While I generally agree with the party line: we are talking $12.5K at age 45. While better than 0, it's not a whole let better, so raiding it isn't going to imperil an otherwise comfortable retirement. You certainly don't want to pay the tax and penalties (which greatly reduce the amount that can be used to pay the cc debt) but it might be better than some other alternatives
Even without factoring in the 10% penalty and the income tax due against the withdrawal it still only addresses a minority of the debt.
Besides, if the worst case senario were to unfortunately play out, assets that are in a 401K I believe generally remain protected through a BK. If the assets have been cashed out they are no longer protected.

That is true, retirement income is fully protected by law from the Trustee grabbing it. The only thing the Trustee can do is to confirm you already have an established pattern of contributing into the fund; if you do, then he or she must allow you to continue contributing through the duration of a Chapter 13.

Re: 401k withdrawal

Anonymous — Mon, 14 Jun 2021 12:39:30 GMT

In my opinion, it's time to go back to the drawing board on this debt problem. After penalties and taxes, the amount you'd have left to put towards the debt would be arguably negligible. In other word, you'd still have a debt problem and then you'd have a retirement fund problem too.

I'd look towards increasing income and lowering expenses. So, time for a second job for one or both of you. Everywhere is hiring, so it should be easy to find something. As for expenses, cut out all of the unnecessary items in the budget. All extra money goes to the debt.

There is no easy way out of debt, unfortunately.

Re: 401k withdrawal

soxfaininfl — Mon, 14 Jun 2021 12:46:25 GMT

Thanks everyone for the responses! I appreciate the advice. Unfortunately bankruptcy is out of the question as I am 5 years out of a chapter 7. I would file again if I could, but I can't.

Re: 401k withdrawal

Horseshoez — Mon, 14 Jun 2021 13:24:53 GMT

@soxfaininfl wrote:
Thanks everyone for the responses! I appreciate the advice. Unfortunately bankruptcy is out of the question as I am 5 years out of a chapter 7. I would file again if I could, but I can't.

You may not be aware of this, but there is only a 4-year window between filings if you go from a Chapter 7 to a Chapter 13; said another way, you are eligible to file a Chapter 13 right now.

Re: 401k withdrawal

soxfaininfl — Sat, 26 Jun 2021 01:55:15 GMT

Chapter 13 isn't an option for me right now as I need to get a parent plus loan to help my son pay for college for the 2nd half of the year for 6k.

I contacted Fidelity, that said I don't no quality for a hardship withdrawal nor can I liquidate the account unless I've been unemployed for 30 days straight. They don't offer either an in-service rollover to an IRA. Right now I have 13,000 in my 401k. I understand there is a 10% penalty for withdrawing early, but this money would eliminate half of my monthly credit card payments on a monthly basis. I pay roughly about 1,200 a month. That would leave me with only 4 accounts to pay off.

Amazon 5k 161 a month

CapitalOne quicksilver 3,500 110 a month

CapitalOne Savor 5,500 160 a month

Upgrade 5k 210 a month

There has to be a way for me to get my money some how. I also owe the IRS over 10k for 3 different years, and they want payment for one of the years. I can get an installment agreement for one year, but they won't do it for the three different years I owe from what I understand.

These are the hardships withdrawal reasons that they have currently.

There has to be a way somehow for me to get my money.

Re: 401k withdrawal

Anonymous — Sat, 26 Jun 2021 01:57:15 GMT

@soxfaininfl wrote:
Chapter 13 isn't an option for me right now as I need to get a parent plus loan to help my son pay for college for the 2nd half of the year for 6k.

I contacted Fidelity, that said I don't no quality for a hardship withdrawal nor can I liquidate the account unless I've been unemployed for 30 days straight. They don't offer either an in-service rollover to an IRA. Right now I have 13,000 in my 401k. I understand there is a 10% penalty for withdrawing early, but this money would eliminate half of my monthly credit card payments on a monthly basis. I pay roughly about 1,200 a month. That would leave me with only 4 accounts to pay off.
Amazon 5k 161 a month
CapitalOne quicksilver 3,500 110 a month
CapitalOne Savor 5,500 160 a month
Upgrade 5k 210 a month

There has to be a way for me to get my money some how. I also owe the IRS over 10k for 3 different years, and they want payment for one of the years. I can get an installment agreement for one year, but they won't do it for the three different years I owe from what I understand.

These are the hardships withdrawal reasons that they have currently.
There has to be a way somehow for me to get my money.

I mean, it seems like they clearly spelled out your options, which are pretty much non existent.

Even IF you were to be able to liquidate the fund, you're going to be on the hook for more than just the 10% penalty. Don't forget about the taxes owed on it.

All you are trying to do is kick the can down the road here. Your financial position is teetering on the edge of the cliff, if it hasn't already fallen off that is. Lots of CC debt, past due taxes owed, and potentially another loan....

If BK isn't an option to at least explore, you simply need more income then. I'd give up on the 401k withdrawal and seek some viable options.

Re: 401k withdrawal

jmw1 — Sat, 26 Jun 2021 21:45:06 GMT

Ignoring the inability to do a 7 right now, you are currently in a bankruptcy situation. You know it. I know it. As you are probably already aware, 401k are completely exempt from creditors except taxes and domestic support obligations. So you should not pay a dime to creditors from the 401k.

As far as your college aged kid, you need to completely get rid of the idea of helping finance his education. He can find a cheaper school or work or finance it himself or delay college. Cry me a river if he won't work and has to drop out. Honestly, I think it's very irresponsible for you to think you can support an adult's college education for many reasons. You can't afford payments already as it is. You owe back taxes to super creditors with super collection powers who have the power to ruin your life. You should not be financing his education on the backs of your other creditors you are unable to pay back. And student loans cannot be discharged in bankruptcy.

You can do a chapter 13 right now and it would be a good way out of this mess because chapter 13 is great at paying down required priority arrearages like taxes and mortgages in five years. The tax authority and mortgage can't say no. The 13 has an advantage because it will force you to pay down ALL of the tax debt at the expense of your unsecured creditors, who may end up getting nothing. I think that's a superior result vs. chapter 7. You will finally learn to live on 100% cash because you will be forced to do it. The court won't even let you use a card to pay your court fees. It's all cash from here on out. You will finally realize financing a college education is totally out of the question. It will teach you how to manage your finances properly. Your 401k will be fully intact. This board is actually kinda dangerous because you get sucked into more debt with auto loans and credit card approvals when you really should be living on cash. Even 0% loans are bad because they come with monthly payments. You will need trustee and court permission to incur debt, which is probably a good thing.

I think you should do a 13 and deal with the back taxes and get that zeroed out at the end of the 13.

Re: 401k withdrawal

LadyJEsq — Sun, 27 Jun 2021 19:54:14 GMT

Hi OP, sorry to hear of the financial straits you're in. I'm in somewhat of a similiar financial straits, in that I too have about 35k in CC debt. For me though, I have enough in my 401k to cover this debt and still leave 6figures for my retirement, and yet dipping into it has not crossed my radar. I just don't think that's something that I should be doing. Right now, I'm looking to join some CUs that have $0 balance transfer fees and will hopefully get a few CCs that I can balance transfer this debt to. I'm also looking into no fee personal loans if I can't get a CC, or a combination of CCs that'll fully cover the debt. It won't solve my problem, but it will allow me to kick the can down the road a bit, assuming I'll be approved. I say assuming because all of this debt is sitting on one card, nearly maxing it out which has had a tremendous impact on my credit scores which were in the 800s and now are in the low 750s. I know I'll be paying interest for a little while longer, but since my purchases were made for investment reason, and I believe they'll yeild significant ROI, I'm okay with that. But I do want to get all that debt off the one card because it's still being used as my daily driver and I get even closer to my limit depending on when my payment hits and when I make a purchase. Discover has been great in that when that happens it does give me 1k CLI which at least takes me from the brink, but I know that won't keep happening. Once I finish joining CUs, which can be conservative, I'll do an app spree for a new daily driver with a nice cash back reward percentage.

I don't know if this is an option for you since you are carrying debt on all your cards where as I'm only carrying it on one card, but I thought I would through this out there because I don't think your 401k should be an option at all given your age. Some CUs are offering $0 balance transfer fee and a period of 0% APR, like Navy Federal which I hear can be generous with their CLs.

Good luck in whatever avenue you choose to take!