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My Unemployment Only Covers My Rent and Gas. Should I Drain my 401K? – Michelle


“Dear Steve,

I was laid off in Dec08 and am at the end of my savings. Although I do get unemployment, it only covers my rent and gas. I am a single mother of 1 and am getting child support which is soley going to help with daycare expenses.

I have 2 credit cards with a combined minimum payment of $500 a month in addition to my other “household” bills. My 401K plan from the employer prior to my last has about $37,000 in it. After the initial penalties, I would get about $21,000 in hand. (I am aware that I will pay additional taxes when I file next year.) When I called TIAA-CREF they suggested an internal rollover that would give me the option of taking a loan out against my 401K at a variable rate starting at 6.5% and payment terms of 1 to 5 years.

My question is, should I go ahead and take the lump sum amount and deal with the penalties/taxes or should I take a loan? Although I’m looking for work, I have no idea when I’ll get another job and can’t see how I would pay the loan back but at the same time, if I cash out my account the government get about a 1/3 of it in taxes and penalties so I’m not sure if it’s worth it.

Any advice you could offer would be greatly appreciated. Thank you for your time.



Dear Michelle,

I am in favor of actions that end the problem and allow you to move forward. I understand the impulse to tap the 401K but I would not do that if at all possible. The minute you tap that you lose a lot and once it is gone, it’s gone.

I’d rather see you go bankrupt to eliminate monthly debt payments you can’t afford instead of spending savings or 401K money making payments that are not sustainable for you.

Your situation is going to be fixed with income once you go bankrupt and the good news is that if your $500 monthly payment is eliminated with bankruptcy then whatever income you can find, it should help you to move forward without nuking your 401K.

The exception to my 401K stand is only if accessing the 401K money is a bridge to something. But simply to drain the 401K or savings to continue down a path with no resolution is just throwing your cash away instead of addressing the real issue.

Let me give you an example of two actual cases I was involved with. In one case the person did not have enough money to bury their dead son. In that situation money from the 401K was used to bury the son. It was sad and unfortunate, but the financial need was over after the funeral. In another situation someone took money from their 401K only to continue to pay monthly expenses and when that money ran out they were still in the same spot, just further down the road, but now with no money saved to grow to feed them when they are old and can’t work. Hopefully that makes the difference clear.

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About Steve Rhode

Steve Rhode
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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