Should I cash in my 401k?

[Anonymous]

I know this has been asked before and I know in general the answer is never, but I'm not sure what my other options are.  My husband got laid off from his job 3 months ago and it has resulted in a loss of $4000 a month for us.  We're going through our saving quickly and I'm scared.  We're reducing our costs as much as possible, but it's just not enough.  I DO NOT want to file bankruptcy...the embarrasment alone would kill me.  I only have $11,000 in my 401k, but it would be enough to carry us through the next few months anyway.  My husband has much more money in his pension and in an annuity, but we've been told we can't touch that.  What would the potential penalties be for early withdrawl?  Woud it be worth it if it means I can avoid bankruptcy?  My husband could potentially be called back to work any day.  Then again, it could be 3 more months.  We have just enough money to get us through this month, and after that, I'll have to start telling our creditors that we simply don't have the money to pay them.  We have 2 daughters to provide for and I'm afraid of not being able to do that in the very near future. 

[Anonymous]

There are potentially "hardship" withdrawls allowed due to heavy financial need, as well being able to borrow against the 401k and then paying yourself back.  You have to judge which works best for you.

You can also determine what your tax liabilities will be.  Often the 10% penalty may be offset by your tax bracket, exemptions, deductions, child tax credits, etc. so that you don't actually incur an out of pocket cost for the penalty.  Talk to your tax professional.

Here is the IRS link to hardship distribution of 401k:

http://www.irs.gov/retirement/article/0,,id=162416,00.html

Personally, I would prefer to tap a 401k for $11k if I could get back on my feet, working and avoid BK.  I would not go BK strictly to avoid tapping into it.  The cost of bad credit in the future will cost you more than $11k in extra interest and costs associated to any type of credit you use for the next several years (auto, mortgage, etc).

However, do make a detailed budget, cut the non-essentials, buy generic/store brand, sell unnecessary and unneeded items to supplement the budget too in order to give you as much cushion as possible along with the 401k.