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Cashout 401k and Then Reimburse? – Roger

“Dear Steve,

Cut back in hours at work. Hard to keep up with the bills. Now have to do something!

Why not cash out or take a paritical cashout. Could you not pay off high intrest loans or credit cards. The money you would save intrest would save money. Then increase what you were putting in your 401. No?

Roger”

I asked my friend Mike Killian to answer your question for you. I wanted to make sure you got an answer as quickly as possible as I’m a bit backed up at the moment. I’ll be watching the comments on this question and be around to help if you need me.

 

Dear Roger,

Of course that is an option but you may want to consider a couple of thoughts before taking that action. Cashing out a 401(k) (which is an awesome program) before you are of retirement age is very costly and the program is set up to be just that way to discourage early withdrawal. Many 401(k)s are set up so that you can save tax dollars and then you are taxed on the amount when you withdraw at retirement age when your income is lower. Withdrawing early means paying the tax upon withdrawal. Additionally, early withdrawal has attached to it a hefty 10% penalty fee in addition to any taxes. But the other troubling thought is this. Though you may have the finest of intentions of repaying the money borrowed, statistics show most folks do not. And that is a tragedy.

Here is an alternative especially if you have matching 401(k) by your employer. Instead of cashing it out, suspend the contribution down to the matching contribution. But don’t go below matching contribution, as that is far to good a deal to pass up. But with the reduced amount that you suspend, apply that amount to accelerate your debt payoff.

You may be interested to know that a simple increase in minimum payment can dramatically reduce the total interest and time to pay off the debt. For example, if you have a $5000 debt at 17% interest and pay $100 per month you will pay $11304 in interest over 40 years. That same interest and amount with a minimum extra payment of just $25 more will reduce the amount of time to pay off the debt and the amount of interest by nearly ½.

In fact I will go you one better. The average US consumer can eliminate all debt including the mortgage in an average 7.5 years with the money they currently earn by utilizing that same principle described in the paragraph above.

You currently have compound interest working for you in the 401(k). You also have it working against you in the debt you owe. Which do you prefer? Having it work for you or against you?

Sincerely,

Mike

If you have a credit or debt question you’d like to ask just use the online form. We are happy to help you totally for free.

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About Mike Killian

Mike Killian
Mike Killian is founder of Learning Credit and Debt Management. He has been writing and teaching about credit and debt management issues for over 12 years. His articles have been referenced by various members of the media, including MSNBC and The Motley Fool. Mike has also offered debt elimination seminars to businesses and community colleges for many years. He has an MS in counseling and is a nationally certified as a Personal Finance Counselor. Mike can be found at LearnCreditManagement.com/.

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