Withdraw Or Not?

December 3, 2007 7:08 PM

Should I use a hardship withdrawal for my 401K to pay down/off my credit card revolving credit debt? The total debt is over $200K. I am 57. I do not anticipate retirement for another 10 years or so. I have approx $100k in the 401K that I can access. I know that there are IRS penalties for such a withdrawal but my thought was it is better to pay off the debt now and build the 401k back up. So, should I withdraw or not?
posted by cmh0150 to Work & Money (21 answers total)

You have credit card-type debt over $200K and 401K assets of about $100K? Any other assets? And other retirement plans such as a defined benefit plan? What's your annual income? Have you been making any headway paying down the CC debt? Have you stopped adding to the CC debt, ie., cut up the cards? Do you own a house? If so how much mortgage is on it? Cars, car loans?

It sounds like you really need a good credit counselor to help you sort this out, but if you can answer the above questions the AskMe crowd can maybe give you some advice. Without this info we're just stabbing in the dark.
posted by beagle at 7:21 PM on December 3, 2007

The World Famous is right, A good financial advisor will look at your overall financial picture, something that is vital for giving you advice on a situation of this magnitude.
posted by jazzman at 7:23 PM on December 3, 2007

Personally, I'd look at selling everything I own and downsizing my life dramatically before I'd touch a retirement plan at age 57. You don't have a lot of years left to grow that nest egg before you are going to need it, and I think it is really worth it for you to take a hard look at everything in your house and have some garage sales, get a roommate, get a 2nd job,whatever it takes to start making a dent in that debt. Do you have any other alternative? Like a home equity line of credit? I wouldn't recommend that necessarily, either, because you are risking the roof over your head but its preferrable to tapping in to your retirement. Good luck, you are in a tough situation.
posted by 45moore45 at 7:42 PM on December 3, 2007 [2 favorites]

With the sparse info you have given, nobody can answer this question. As you can see, it is also giving heart burn to a lot of people.
If you do not have other assets you are insolvent, and I would personally be talking to a debt counsellor about going bankrupt - at 57yro you really don't have time to pay down such a large debt and accumulate retirement savings, especially if you are in the US and have the concern of health expenses looming.
You are probably correct you won't be retiring in 10yrs - I would think you would struggle to retire in 20 unless you have substantial other assets.
If you have other assets, your best bet is probably to throw away the cards and consolidate them into a mortgage or similar.
Hopefully you are living in Europe or Australia where you will have access to retirement benefits and healthcare, otherwise I think things are going to be a bit more grim than you may be expecting.
posted by bystander at 7:43 PM on December 3, 2007

Best answer: Withdrawing money from your 401K probably isn't the best idea but I agree with beagle. Get professional help....

http://www.stretcher.com/stories/99/991227d.cfm
posted by meta x zen at 7:45 PM on December 3, 2007

Interestingly enough my college professor tonight told my class that paying off your credit card is absolutely the number one investment you can make. As long as you have credit card debt any other investment besides paying it off is a terrible idea.
posted by pwally at 7:45 PM on December 3, 2007

nothing wrong with credit card debt. although it sounds like op has the wrong kind.

I have over $120,000 in credit card debt... at 0-1.99% in mutual funds generating 5.10%+.
posted by Mr_Crazyhorse at 7:49 PM on December 3, 2007 [1 favorite]

Yes, liquidate the 401K. Do everything you can to get rid of that credit card debt. There is no other option. Sooner or later they are going to come after all your assets and you will find yourself having to declare bankruptcy. You might want to check out some credit counselors and see if they can offer to help you negotiate some sort of payment plan that might fit your budget.
posted by bkeene12 at 7:53 PM on December 3, 2007

Response by poster: ok... i am a meta newbie...

a bit more info - income is 140k; i really do not plan on retiring for a long time...

i own with two mortgages totaling 400k - one being a line of credit for which i have about 20k available...

i can access 100k in my 401k but even taking that... i would still have about 150k left...

i know i should talk to a counselor and have put some inquiries out there... but none have been very impressive in their presentation... i was hoping metafilter could do the job...
posted by cmh0150 at 8:09 PM on December 3, 2007

Best answer: It's irrelevant. You can't. IRS hardship rules - here are the circumstances under which you can take a hardship:

* Expenses for medical care previously incurred by the employee, the employee’s spouse, or any dependents of the employee or necessary for these persons to obtain medical care;
* Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments);
* Payment of tuition, related educational fees, and room and board expenses, for the next 12 months of postsecondary education for the employee, or the employee’s spouse, children, or dependents; or
* Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence.

Additionally, you couldn't take earnings, only amounts you've deposited. Depending on state and local taxes, you would be very lucky to get a check for 60% of the actual amount removed from your account. And based on what you've written here, you'd have to commit fraud to get that money.
posted by peep at 8:36 PM on December 3, 2007 [1 favorite]

I recently considered doing something like this after some extraordinary expenses left our family with more credit card debt than we're comfortable with, and feeling really strapped to pay. Our retirement money isn't in a 401(k) right now, but in a SEP-IRA, but the principle is roughly the same. To remove it, we'd pay a 10% penalty off the top. That means that, say, to get $9000, we'd have to pull out $10,000. The $1000 penalty is equivalent to paying 11% on the money right off the top; that's before we pay the taxes on the money.

Our credit card debt right now is at 8.9%. Effectively, we'd be borrowing from ourselves at a higher interest rate than we're paying the bank. Doesn't make sense for us.

We have: reduced expenses, and eliminated retirement and college savings and charitable contributions (with one especially beloved exception). We might: sell one of our cars. I am a stay-at-home mom; I might go back to work part-time, temporarily until we can pay off the debt. Things like that.

If I were you, I'd start by looking at your home. If you're in a market where a house worth more than $400,000 is a luxurious home and you could get a decent one for a lot less, that's something to consider (if you could sell in this market, etc etc).

I'd say the bottom line--as it is for us--is being willing to make some hard decisions. I don't want to go back to a job I hated; we don't want to have to sell a car; heck, 2-3 nights a week I don't even want to cook dinner instead of getting takeout. But we're having to accept some of those kinds of things right now.
posted by not that girl at 8:41 PM on December 3, 2007 [2 favorites]

I'm really curious as to why you have found the financial counselors you have consulted thus far to be "not too impressive". Don't confuse the fact they are giving you advice you don't like with bad advice. You might not like to hear what they have to say, but geez, you are making a boatload of money and in hock up to your eyeballs and looking to cash in the only bit of security you have for your future? You need a serious wake up call. $100,000 for retirement is pretty small based on your age. You might think you'll be earning your salary for as long as you want to work, but health and jobs are wild cards and cannot be relied upon to hold up.
posted by 45moore45 at 8:43 PM on December 3, 2007 [1 favorite]

You need a good advisor, but it sounds like even an average advisor would give you better advice than you're giving yourself, so don't sweat finding the best too much.
posted by Mr. Gunn at 9:12 PM on December 3, 2007

Best answer: With early withdrawal, you pay a 10 percent penalty, plus taxes at your current income tax rate. That $100k will be reduced by a third or more right off the bat. Not a good plan.

You have a great income, which means you have a tool for digging yourself out of this hole if you're really dedicated. If you haven't already, stop spending money you don't have. Get on a strict budget, and start putting every dollar you have towards the debt. I personally like a method such as Dave Ramsey's debt snowball, outlined in his excellent book The Total Money Makeover (the author is religious and the book has a bit of that, but you need not be religious to follow its advice). Other financial advisors offer similar versions of the same plan. Basically, focus on paying off one debt at a time until you've paid them all off. You didn't get yourself into all of this debt overnight, and you're not going to be able to get yourself out of it overnight.

You can do this. You can pay off your debt by cutting back on your spending and living frugally and confronting the problem. It will take a few years to pay it all off, and it will be hard. It will also feel great to be really doing something about it instead of simply trading one problem (a huge debt) for another (a big hole in your retirement account plus a slightly smaller huge debt). With your income, you can afford to pay your debts with your salary without stealing from money you'll need when you're older and can't work anymore.

If you want to talk more about methods or anything else, I'm available any time by mefi mail.
posted by decathecting at 9:16 PM on December 3, 2007

Response by poster: i have gotten solicitations from counselors in response to my request on a website that deals with fee-only counselors...

looking at their emails and websites, it is all geared toward those who are trying to leverage their income...

i was hoping to find someone who was more directed at helping those, like myself - plus, i really hate to spend any money to pay for advice they would give...

the amount i have in retirement is more than 100k - that is what i have put in thus far... but you are right.. still a small amount...

i have excellent health benefits, including disability.. job is very secure as well...

but yea... this is the wake up call for me...
posted by cmh0150 at 9:16 PM on December 3, 2007

Dude, it sounds like you are living like a real American.

Can we get "staggeringly-unfunny-use-of-tired-ass-anti-american-sterotypes" added to the end of "offensive/racism/sexism"? i think I would use it a lot.

re: the question. yeah, talk to a financial adviser about how to lower your interest rates.

Interestingly enough my college professor tonight told my class that paying off your credit card is absolutely the number one investment you can make. As long as you have credit card debt any other investment besides paying it off is a terrible idea.

HUGE overgeneralization, as the very next commenter pointed out. Kind of amazing anyone with a background in economics, let alone a professor, would say that. Average return on stock market investments is historically around 10%. It is very possible to achieve lower interest rates on credit cards.
posted by drjimmy11 at 9:57 PM on December 3, 2007

Best answer: If you have two hundred thousand dollars in debt, it's not difficult to think of a few ways you could speedily come to qualify for a hardship exemption without committing fraud.

That said, I don't think it's a good idea to try this. Here's why: you're two hundred thousand dollars in debt. That money's not going to magically materialize. Even if you pulled out all the hundred thousand from your 401(k) - assuming you could do - after taxes and penalties you'd be looking at still having $150,000 in debt. You may eventually have to declare bankruptcy. It's good to know that 401(k) contents are generally protected from your creditors, including bankruptcy.

If bankruptcy is on the table - and I'm telling you, it's not off your table - which would you prefer? Gut your retirement account and later be forced to declare bankruptcy with nothing? Or declare bankruptcy, zero your debts, and still have $100,000 in the bank so you can actually retire some day?

Think about it.

Meanwhile, for really good free advice on these kinds of topics, consider a post to the Motley Fool CC Debt forum. The regulars on this board have it down to a science and if you're willing to answer their questions they'll essentially give you free financial planning. (If you need an invite to the boards, just mefimail me with your username.)
posted by ikkyu2 at 11:49 PM on December 3, 2007 [1 favorite]

Cut up those credit cards.
posted by Carol Anne at 4:58 AM on December 4, 2007

Best answer: Here's your real problem: you have practically no net worth.

The equity in your house (I'm taking a guess here) is under $100K, and your 401K is $250,000. Against this, CC debt of $200K. So your net worth is $150,000 at age 57. A person with $140K in annual income should be worth a lot more than that.

Beyond the debt counseling, you need financial planning assistance to put a real retirement plan together. You may not feel like retiring for 10 or more years, but assume that by age 70 you may want to hang it up. You'll want to continue your $140K lifestyle, or something close to it. To do that, your net worth should be closer to $2 million, which is a tall order. How to get there is beyond the scope of what we can figure out with you, but with some serious restructuring of your priorities, it's not impossible to do so.
posted by beagle at 6:05 AM on December 4, 2007

Kind of amazing anyone with a background in economics, let alone a professor, would say that. Average return on stock market investments is historically around 10%. It is very possible to achieve lower interest rates on credit cards.

Consider the audience, college students aren't likely to have credit cards with rates under 10%.
posted by drezdn at 8:44 AM on December 4, 2007

Some 401k plans allow you to borrow up to half of your current savings. (Mine charges a 8% interest rate. There's no tax consequence iirc.) If your credit cards are charging you more, it might be worthwhile to borrow as much as you can from your 401k to pay down part of your credit card debt. That way, you are at least paying the interest of that loan back to yourself.
posted by of strange foe at 9:07 AM on December 4, 2007