Questions & Help with "Cashing in a 401K"

[Jack The Ripped]

I am not sure where to post this,

I have come to a pint financially that I have to cash in (or least) a portion of one of my 401K plans. I know this is not wise and I will pay penalties and taxes but I have now choice other then to start being late or missing house payments and other bills. I have always prided my self on an 800+ credit rating. But since being laid off a while back from a very good paying job I am unable to make ends meet with the 40% - 50% of the income that I used to have.

Do any of you have any advice on how to do this? Or is there certain things I should do or not do?

How long does it normally take before I have cash in hand??

Thanks for any help

JTR

[harvey lee]

Would it be possible to borry some money from a bank or other lending institution?

Some 401K's do allow for one to borrow and make payments back to their 401 and that would be better than just taking it out and paying all the penalties for a withdrawel.

I do believe one can also withdraw funds for a hardship without a penalty. Not sure what is considered a hardship. I wouls call your 401K account rep and ask what options you may have.

[crothmeier]

yeah call the 401k people and they will inform you of what your options are, how long it takes, and what penalties are involved. Each company differs.

[Jack The Ripped]

When I was looking for work (of any kind) I was living off of unemployment and also borrowing against my home. I have now almost pegged out that line of credit.

I don't think that borrowing more is the answer because I have a tough time paying what I owe now.

If I could get a job that paid as well as I had it things may be different but I don't see that coming anytime soon as I once did.

This economy thing just hit me at a real bad time. I know I could always sell my house but I am not sure that is the answer either, we all have to have a place to live.

Thanks again

JTR

[DTro]

I’m far from a financial advisor but I would look a little more into selling the house if you cannot afford it. Unless you see a light at the end of the tunnel and you think you should be able to get back on your feet sooner rather than later.

The reason I say that is because, you may end up draining your life's savings in order to pay (I’m assuming) mostly interest on your house. Then you might be left with nothing and still have the debt to pay.

There are so many different factors involved, but everything I’ve ever read says not to touch that money unless that is your last option, which indeed might be the case here.

You REALLY need to sit down with a professional and get their advice. We can give our opinions here, but that is easy when it’s not our money/home.

Good luck and sorry to hear about your misfortunes.

[BobT]

Without knowing your financial situation (completely) it is nearly impossible for anyone to offer any sound advice or opinion.

I've been in your situation. Some things to consider before cashing in your 401K.

Really look at your home. Is it really what you need or can you live in less? The optimum word is need. Most of us can.

Can you refinance your home to stretch it for a longer time than your current mortgage? This could reduce your monthly obligation.

How about other loans like auto. Can you refinance those to reduce your obligation.

Don't forget about home equity you may have. A home equity loan often comes without closing costs and the interest might be tax deductible. An auto loan for example is typically 6 years on a new vehicle. I just checked with my bank about a HE loan and I can finance my new truck for 30 years if I want. The required monthly payment would be $123/month at 6.25% vs. $385/month for six years. Just because you write it for 30 years doesn't mean you have to pay it for 30 years. Once you're back on your feet you can pay it off early without penalty so just pay more then.

Also, if you refinance your auto using an HE loan, your vehicle is no longer the collaterol for your loan so you are no longer bound to carry full coverage insurance, just liability by law. Until you get back on your feet that might be a way to reduce your auto insurance costs. Naturally, there is a risk of an accident but you're already risking the loss of your retirement package.

Consider loan consolidation. If you have multiple credit card debt perhaps you can get a loan to consolidate and reduce your monthly obligation. Once you do this, throw your cards away and NEVER use one again.

[tacklejunkie]

I am not sure where to post this,

I have come to a pint financially that I have to cash in (or least) a portion of one of my 401K plans. I know this is not wise and I will pay penalties and taxes but I have now choice other then to start being late or missing house payments and other bills. I have always prided my self on an 800+ credit rating. But since being laid off a while back from a very good paying job I am unable to make ends meet with the 40% - 50% of the income that I used to have.

Do any of you have any advice on how to do this? Or is there certain things I should do or not do?

How long does it normally take before I have cash in hand??

Thanks for any help

JTR

As others have said, there is a hardship clause were you can avoid the penalties but you will need to talk to your rep.

Good luck to you and I hope everything works out for you

[shizzy]

You REALLY need to sit down with a professional and get their advice. We can give our opinions here, but that is easy when it’s not our money/home.

Good luck and sorry to hear about your misfortunes.

X2

you are going to take a pretty substantial hit on an early withdrawl. the taxes are going to snuff around 25% of what you have sitting there. also you may not be able to borrow against it if you are not currently employed and contributing.

[fishorgolf]

My advise would be to do everything else possible before tapping into your 401K. I felt had to do it once 20 years ago and it was one of the worse decisions I have ever made. I should have figured something else out but it seemed like the best option at the time. It wasn't! I have been able to build up my retirement saving again over the years but if I would have not touched that 401K when I did I would without a question be retired today.

[Powerstroke]

I think Dtro made a very important point and that is even if you don't receive any penalties, you will still have to pay taxes and once you have money in hand you are paying mostly interest on your home.

I would seriously consider any and all other options before touching your nest egg. It took you a lifetime to build and using it in a time of weakness is not the answer.

I have seen my parents completely drain all their life savings for far less than your situation. They are now nearing the time when most people will think about retiring and they don't have a penny to their name.

If you do have substantial equity in your home maybe think about a reverse mortgage.

There any many options out there that don't include touching your 401K. I would strongly advise against using that money.

[delcecchi]

If you are underwater on the mortgage, it might be wise to just stop making payments since it will take a long time for the bank to take the house. On the other hand if you have equity in the house then perhaps something else is the answer.

[bmp78]

If you are underwater on the mortgage, it might be wise to just stop making payments since it will take a long time for the bank to take the house. On the other hand if you have equity in the house then perhaps something else is the answer.

So someone gives you a loan and it is best to stick it to them and not pay the interest?? That is one of the reasons we are in the troubles we are in this country. People think it is a guarantee to make money on a house and borrow money from a bank to buy it. Then the real estate market crashes and they feel no need to pay back the people that borrowed them the money to begin with. I agree with the other posters and their options.

[Coach1310]

I'll side the other way.... If you are considering cashing in your 401K things are definitely rough. You need to meet with your rep to see if you qualify for a "hardship". If your house has "value" you may be able to sell it to get yourself out of some of the financial trouble you are in, but you have to live somewhere.... however a "home" is not a house, but where you family is and where you make it. If you need to cash in part of your 401K to make it through and you feel it is the best option, you might have to do it. It will hurt... down the road it will hurt.... but life isn't all good times and happiness. Sometimes the tough decisions need to be made. Best of luck.... hopefully a job with find you soon.

[Phred52]

Okay, I realize that this is off in another direction, but here goes. I am retired, last fall (out of sheer boredom) I decided to find some useful work, something that 'paid' (beer money). I live in south-central Minnesota and didn't "have a clue" where to start. well, it was the start of harvest season and I thought I'd 'offer' my services to a 'harvester in need'. I, at that time, had driven a 2.5 ton truck and a little Ford 9-N tractor. I was hired to drive a 4440 J.D. with 2 or 3 Gravity boxes from the field to the Elevator. I was asked what I wanted, $/ph, I told them $10 cash or $14 "on the books". I worked fo 3 different farmers last fall and so far I have 7 lined up for this fall, and have turned 2 down already! For me it's 'cool cash', On a 'lark' I made like $3,800 last fall and now I have more acreage to hunt than I EVER dreamed of!! If you're good AND careful, you'll be invited back and your past employers will spread the word!! Prior to this I worked in a CHEESE PROCESSING FACTORY!! Phred52

[fisherdog19]

I'm assuming that with your cut in pay, you may not qualify for a debt consolidation refinance, but it may be a great option to lower your debt load and increase your monthly cash flow. A reverse mortgage is not an option as you must be 62 years or older to do one. On your 401k, depending on your income and how much you draw, you will have to pay state and federal income taxes on it and may or may not have an early withdrawl penalty. If you'd like to speak with me about your options or just have some questions, please give me a call anytime, I'm here to help.

[BobT]

Quote:

I'm assuming that with your cut in pay, you may not qualify for a debt consolidation refinance, but it may be a great option to lower your debt load and increase your monthly cash flow.

The thing to remember here is that you would be negotiating with your bank. They will be facing a choice. Either work with you or spend the time, money, and pain of calling in your mortgage. If they have any ounce of commen sense, I would think they would do what they could to help you save your home. To foreclose costs them money and time. Right now, it is not very appealing to have another house on their books to sell either.

[fisherdog19]

Negotiating something like this is not an option most of the time, as far as a consolidation loan is concerned. A loan modification may be available but he may have a low rate already without much room to decrease payments. Secondary market loans used in debt consolidation refinances must comply with national underwriting guidelines which are not negotiatiable, and most smaller local or regional banks won't give an in-house loan if the borrower does not credit qualify. Any other questions?

[fishermatt]

Sorry to hear about your tough spot. You are not alone even though it probably feels like it.

If you have little or no equity left in your house, you may want to at least consider letting it go back to the bank. The bank doesn't really care about you, so letting them have the house back shouldn't bother you. Maybe you can Rent somewhere way cheaper while you are getting back on your feet. Yes, your credit will get whacked, but you're 401(k) money will still be intact. What if you use up All of your 401k money to make house payments? The next month after that is gone when that payment is due again will really suck......

[bturck]

As mentioned a couple of times already I would certainly talk to your 401K rep, not your former company Human Resource rep. If you pull the money from your 401K the early withdrawal penalty is 10% and no tax liability if you pay it back within your funds alotted time. If you cannot pay it back the tax liabilities and the penalty add up to around 40%. Definitley a pretty high priced loan. Wish I had more of an answer but I don't. However before you make that move talk with your rep. It may also as mentioned selling the house, even if its a short sale, vehicles, boats etc. I know that is a really hard pill to swallow but it might be the thing to do until this whole mess turns around. Good luck with your choice.

[BobT]

Negotiating something like this is not an option most of the time, as far as a consolidation loan is concerned. A loan modification may be available but he may have a low rate already without much room to decrease payments. Secondary market loans used in debt consolidation refinances must comply with national underwriting guidelines which are not negotiatiable, and most smaller local or regional banks won't give an in-house loan if the borrower does not credit qualify. Any other questions?

I guess you told me!

[Jack The Ripped]

Thanks for the feed back so far guys I really appreciate it!

Thanks fisherdog19

A little more info about my situation, I will list them in bullet points and in no particular order.

· Home value = $229,000 (REALISTICALLY estimated from local comparisons in the area I would prefer $249,000)

· Amount still owed $135,225 + 2nd mortgage @ $25,400 totaling $160,625

· 25 years left to go on a 30 year fixed mortgage @ 5.625% (I don’t think I would qualify for this now though).

· I have no car payment

· I have racked up approximately $10,000 in other type debit loans, Credit Cards during my situation.

· I owe approximately $15,000 on boat (Which I would or may sell in 5 Months)

· Currently all credit cards are at interest free status (soon to expire in December)

· I am NOT NOR HAVE NOT been late on any payments thus far. (I will be soon though)

My current 401K status:

· I have three separate accounts only totaling $65,000 ±$1500 depending on the day

· I only want to cash out about $15,000 putting $10,000 in hand for keeping current on my bills.

· I am not talking about cashing in anymore then 25% of current value

· At this point with my research I would still qualify to only pay 15% Federal income tax due to this years income being low. (I could be wrong).

Me:

· Late 30’s

· Single, No Kids,

· Completely willing to sell my home and move for the right job (I feel this would be my best option, it just has not come along just yet)

. I have always (past 15 years anyway) had an 800+ credit rating and don't really have any intention of letting my house go back to the bank.

I contacted the bank (W/F) earlier this year, All I wanted to do was try and push 3-6 months of current payments to the end of the loan. 100% unwilling to make any deals unless I was 2-3 months behind in payments.

Thanks Again!!

JTR

[Jackpine Rob]

Give Fisherdog a call if you haven't already. Perhaps a refi/consolidation of 1st and 2nd would lower your monthly payments, without increasing the debt load.

If it were me, that boat would be heading down the driveway hooked up to someone else's truck ASAP. One thing to really watch is those unsecured lines like the credit cards, etc. Years ago I got myself in a bind in a situation similar to what you are describing, and it took me over a year to climb out of that hole.

Using a part of that 401K may make some sense - but be careful that in doing so you aren't just putting off the inevitable, while paying a bunch of extra taxes.

Good luck to you.

[shizzy]

are you ahead or behind on the boat? I agree that thing should get sold I would also look hard at selling the house and getting in to something much cheaper.

I dont really see what taking out 10-15K will do for your situation in the long run.

Boat sold, moved to a smaller house, CC's paid down with what cash you end up with, the rest goes in to savings and you live cheap till things pick up.

BTW, that 10K in CC debt is going to be a monthly headache.

Again, you need to look long and hard at all the extras that can be trimmed. you are single with no kids. how much house do you need. nice boat? not if it means im going to be living on the street.

once you get your monthly expenses in order you would be suprised at how little money you need to be bringing in. I got laid off and ended up at wally world and due to me seeing the layoff coming and paying things off I was able to make it on $8hr. it wasnt pretty, but it was manageable.

Price the boat and the house to sell, not to make top dollar. as much as I like a steak dinner, if my choices are either hamburger or no dinner at all, Ill take a burger any day.

[wmn luv me walleye fearme]

Actually the bank would love for you to let the house go back to them since you have 60k in equity. They wouldnt mind it one bit because unlike most times they would actually make money off the deal.

Unfortunately you wouldnt be to do any of the mortgages these guys are mentioning without a income. (they cant use unemployment income to qualify) If you do get a lower paying job you would have a chance to qualify for a 5 year note modification through w/f but i've heard it can be pretty difficult to do. (you can get a reduced rate down to as low as 2% for 5 years if you can show financial hardship and that the mortgage payment is to high in relation to your income) Hopefully you at least can get a decent rental deal in todays housing market.

Personally if you think you still might be in this bind long term then it might make sense to sell the house pay off the debt and you should find you could live decent off the unemployment plus you have about 30k left over should you rebound and get a different job down the line to put down on your next home. The 401k withdrawel would generally only make sense if you realistically see a light at the end of the tunnel sometime soon. Plus who knows, by the time you go to sell the house next year it could be worth more, but it might also be worth 210 and you would have less money at that point. (I work for a mortgage company as well and once that 8k tax credit for first time home buyers goes away their is a decent chance of any type of housing rebound being bumped back a while longer.)

good luck to ya

[Coach1310]

Well... with the particulars you mentioned, I think you UNLOAD the house #1. If you only owe 165,000 and think it is worth around 229,000 that is a no brainer in my opinion. Even if you only get 200,000 that still leaves you with 25,000 even after paying down your 10,000 in debit/credit card debt. A single person can find places to live cheap..... it definitely helps that you are the only one to provide for vs. a family...