We Are Flat Broke And Need to Drain Our 401(k). – Susan

“Dear Steve,

Currently collecting unemployment after being laid off from my job back in Feb 2009. It is exactly enough to pay my rent. My husband’s income is mostly from tips and some side jobs he does. We have very poor credit and our utilities are behind and have no savings. We have 2 children, one of which is in her last year of college that also needs financial support from us. I am 42. My husband has no retirement.

I have a little over 32k in a 401k. I had borrowed $15k from it in Aug. 2008 as we were moving across country. The balance shows $32k, with $13k of that still owing from the loan. We really need the money now. What will this mean to us if I cash it out now?


Dear Susan,

Sometimes you need to do what you need to do. If you need to cash out your 401(k) then you need to talk this over with your 401(k) custodian and ask how to do it. If the original amount was reported as a loan you may now have to pay taxes and a penalty on that original amount when you close out the account. You will be left with a lot less than your balance.

Do You Have a Question You'd Like Help With? Contact Debt Coach Damon Day. Click here to reach Damon.

I see the need but my concern is what happens once the remaining money is gone and this situation happens again. And it will. Unless we can change the underlying situations the utilities will get behind again, bills will be due and then what. The only thing that will have been accomplished will be the current crisis will have been averted, your entire retirement account will have been plundered and lost and you will be even further up against the wall.

This is definitely a tough situation. One I would not want to be in myself. But maybe we need to face the issues with some effective solutions rather than just postponing dealing with them? It might just be you have to have the difficult conversation with your kids that you are broke and can’t help them right now. It is a difficult conversation many parents have had to face over the ages.

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Maybe you need to talk to social services about utility assistance and food stamps and other benefits. Maybe a trip to the local food bank is on order. Maybe it is time to put everything on the table and reach out everywhere for help but leave the 401(k) alone.

When the time is right it is easy to rebuild bad credit. I’m not worried about that. I’m worried unless you address these situations now, you will be homeless with an empty 401(k) account latter.

Please update me on your progress by

P.S. Be sure to read ‘The Secret of Surviving Through Difficult Economic Times. What I Learned On My Journey‘.

Damon Day - Pro Debt Coach

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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