Hey, that worked out...

June 16, 2014 11:05 AM

I'm looking for stories about 401k withdrawals made under the age of 55 that didn't lead to any regret. I'm asking this because the "sane" thing to do with 401k-s always involves NEVER touching that money until retirement. So has anyone gone off this path and found out that it actually helped them out in the long run?

PLEASE (and I make this request humbly) refrain from answering if you want to give your opinion on why it's a bad idea, or how you touched that 401k money and it didn't work out. I'm really not interested in those answers. If you feel you must I don't begrudge you. Just know that you're not answering the question I posted.

posted by anonymous to Work & Money (24 answers total)

I don't regret taking out $3k, because it helped me get the house that I and my fiancee' are currently living in and fixing up. My company takes out a predetermined amount each paycheck and I got to choose how long it would take to pay that $3k back.
Regret? No Siree Bob.
Purists may screech in horror at this, and yeah, maybe it will throw off my retirement plans, but to be honest, I don't CARE.
We got the house that we really wanted and we love working on it together.
posted by John Kennedy Toole Box at 11:10 AM on June 16, 2014 [6 favorites]

I pulled $10K or so out of my IRA to cover closing costs on my house. Definitely worth it.
posted by suelac at 11:15 AM on June 16, 2014

A friend took money out because of an unplanned pregnancy and unexpected need for a baby-appropriate living space and vehicle. "Baby" is six years old now. Friend doesn't regret it, and in fact (1) being a parent and (2) having made this decision that is arguably not the smartest financially (I'm not dwelling on it, but just letting you know that it is one of the factors friend has mentioned), has motivated friend to make financially smarter decisions than ever before.
posted by Bentobox Humperdinck at 11:18 AM on June 16, 2014

Thirding using the money towards first home purchase.
posted by Dragonness at 11:18 AM on June 16, 2014

I worked at a large company that matched 1:1 the money I put into a 401K during a summer internship, so I stuck in the max I could put in. I lost a third of it to the index fund (put it in at the peak and it got killed in the 2008 crash and then I moved it to a "CD"), but because of the company match I still got some "free money". When I left the company and I converted it to a traditional IRA at a credit union. Then I immediately rollovered it into a Roth IRA.

Just a year ago I yanked the "principal" of about 5K out of the Roth IRA and was just past the 5-year mark so didn't have to pay any tax or penalty. Left about $20 in interest in there. The 5K I wasted it on another person and I regret how I spent it, but I don't regret taking the money out if that makes any sense. Try and do the rollover trick if you have five years, so you can avoid the huge penalty fees.
posted by tasty at 11:20 AM on June 16, 2014

When I was 29 I took out $5k for a cross-country move, mostly for personal reasons but also because I was in a dead end, depressing job. I don't regret it at all - my career has taken off after the move and thanks to my increased earnings I think I'm better off in the long run despite the hit to my retirement savings.
posted by marshmallow peep at 11:24 AM on June 16, 2014

I have done this several times (well, loans, not withdrawals - but peoples' horror is often the same for both). Each time, I was explicitly warned, "Noooo, you'll fuck up your future!" Each time, I did NOT, in fact, fuck up my future, and was in actuality saved from a much worse alternate outcome.

Loan One: I got divorced at 24. I had zero assets and my husband got the house. I took out a $10K loan to restart my new life. This meant the difference between "crawling back in shame to my parents' house and living in their smoky, dim, depressing den" and "living in a nice one-bedroom close to my office". I paid myself back (with interest!) in several years, all while continuing to contribute.

Loan Two: A number of years later, I had accumulated a fair amount of credit card debt. I took out a loan, paid off all of that debt (which had an average interest rate of 15%), thereby saving myself literally thousands in interest. I repaid the loan within two years; my 401K was robust before, during 'n after.

I also plan to take out an actual withdrawal in the future to buy a home.

Honestly, no one knows WHAT THE HELL their future will look like in 50 years, and acting solely in the interests of Nebulous Future-Self is kinda silly. You need to do what you can to take care of your business NOW, and if this includes a one-time (or in my case, a two-time) raid on your retirement account, well, that's what it takes.
posted by julthumbscrew at 11:30 AM on June 16, 2014 [6 favorites]

Rather than taking a distribution ("cashing out") of part of his 401(k), one of my old bosses took out a loan from his 401(k) when he had to "buy in" to the law firm equity partnership structure when he made equity partner. He was tapped out on easily accessible cash because he had multiple kids in college, and the declining real estate market made accessing his home equity problematic (or perhaps he had already done that as part of the college expenses).

While he had a bunch of other ways to finance the buy-in (via private lending from banks), he ran the numbers and the 401(k) loan made more sense to him.
posted by QuantumMeruit at 11:32 AM on June 16, 2014 [1 favorite]

I took a loan to help with a home purchase, and I don't regret that. I do regret that my employer went bust two years later, so the balance on my loan became taxable, penalized income, right when my wife was diagnosed with an expensive chronic illness. We're still climbing out of that hole.
posted by infinitewindow at 11:35 AM on June 16, 2014 [1 favorite]

In my foolish youth, just before the dot-com crash, I cashed out an entire 401k that I never knew I had (didn't realize it had vested) to buy my first house. I ended up making monthly payments in penalty to the IRS for years, but I would do it again in a heartbeat.
posted by mmiddle at 11:37 AM on June 16, 2014 [1 favorite]

I took about $24k last year to pay off some really crippling credit card debt (due to stupidity and my ex-husband's gambling addiction). I was having a really hard time paying off the debt with my income at the time, and the interest was adding up faster than I could pay it off. I had a pretty substantial amount in my 401k, so the withdrawal didn't really leave too big of a dent.

At the time I took out the loan, I talked to a financial adviser to make sure I included the amount I would have to pay in taxes in the total I withdrew. (I can't remember what the taxes ended up being).

It was seriously the best thing ever. I needed to be able to start with a clean slate in order to make sane decisions with money after years of bad habits. I think the debt would have taken me at least 10 years to pay off and I would probably have gone crazy from the stress before then.
posted by elvissa at 11:37 AM on June 16, 2014

When we decided to move to a new city and sell both of our houses in one of the worst real estate markets of our lifetimes, both my future husband and I had to come up with a way to cover the differences in what was owed on the house and selling price.

For my house, I cashed in a portion of an old 401(k) I had from an earlier job. For his house, we used a portion of my severance package from leaving my existing job. Doing so allowed us to start fresh in a new city and after a year or two of renting we were able to buy a house together.

The relocation was probably one of the best things I've done, and being able to get out from under our two houses was a great use of the money. The tax hit wasn't too horrible since we got married and sold two houses for a loss in the same year.
posted by teleri025 at 11:38 AM on June 16, 2014

I had a few hundred in a 401(k) from an old job I had in the late 90's; I was really skint, but I'd always been told never to withdraw a 401(k) until you retired. Rather than rolling it over, the other bank turned it into a check, and I went to my own bank to talk to someone about putting it into an IRA. The finance lady talked to me a bit first - why hadn't I just done a straight rollover? I didn't know how to do that? Okay, fair enough; how much was I putting into my IRA that year otherwise? Nothing? Really?

"Yeah, I'm....kinda broke," I admitted.

She stared at me. "So....why aren't you using this money now instead of putting it in your IRA?" she asked.

And it just struck me that if even the people who give financial advice are telling you to cash out a 401K, then you need to cash out that 401K.

I did have to take a financial hit come tax day - I was taxed and penalized on that kinda big. But, I also was due a pretty hefty refund before those taxes and penalties were applied - that year I was able to claim a bigger-than-usual number of deductions - so I only had to pay about $100 at tax time at the end of the day (rather than....I don't remember, but it was bigger).

So if you're REALLY broke now, and you think you could get a big enough refund come tax time to offset the penalties you'll have to pay, it could work out okay.
posted by EmpressCallipygos at 11:50 AM on June 16, 2014

I took three separate loans of about $3000 each out of my 401(k) to pay credit card debt after my divorce. I danced with joy when I paid them all off. Absolute joy. No regrets.

When I decide the time is right to buy a home, I will withdraw some money to help. I don't know how long I'm going to live. I don't know if I'll ever get to retire. It's my money.
posted by kimberussell at 11:51 AM on June 16, 2014

I took out a small ($5k) 401k loan to help cover closing costs to get out from under a house I still owned with my now ex-husband. I'm a little bummed that it locks me into my current job for several years to pay it back (or pay penalties) and yet still A+++ would 401k loan again. I now have a life that doesn't involve paying a large mortgage+taxes+homeowners insurance to live in a neighborhood I hated in a too-big house. My life is immeasurably better now, and the small amount I pay back to myself every paycheck is nothing in comparison.
posted by misskaz at 11:59 AM on June 16, 2014

When I was hit by a car and ended up being out of work, cashing out my 401K ended up being the difference between losing our house and not. Zero regret.
posted by anastasiav at 12:04 PM on June 16, 2014

I cashed out a 403(b) when I was about 24. I had been accepted into Graduate School and needed to 1) move to the city where the school was; 2) get a job; and 3) keep myself above water until I either got my first paycheck or my student loans came in. After the early withdrawal penalties (they took them out on the spot) I wound up with just enough to cover first month's rent on a shared house, food, books for my first class, and student fees.

It was 100% worth it.
posted by Elly Vortex at 12:27 PM on June 16, 2014 [1 favorite]

I had no choice but to withdraw the entirety of my 401k from my last job, because that was simply their policy for anything under 5K, and I hadn't been at the job terribly long. The amount that was left after taxes I socked away in savings against my next year's tax bill, and did not regret it for even one second.
posted by like_a_friend at 1:12 PM on June 16, 2014

Also, something else that may make you feel better as you contemplate this decision: it's easy for other people to make you feel awful/incompetent/foolhardy/whatever for various financial choices, but THEY do not have to live your life. It's all fine and well for them to say, "Bleh bleh bleh, you REALLY ought to have six months' emergency income!"... but guess what? Lots of people don't have that... not in their twenties, not in their thirties, not EVER. And lots of people have financial emergencies RIGHT THIS SECOND, and cannot magically transport themselves back in time several years prior to become more fiscally-prudent. Me? I probably would fail to create that mythical six-months-of-income buffer even if you put a freaking gun to my head. And yet I still have to live my life, with crises and car troubles and unexpectedly high electric bills.

All we can do is the best we can, and any kind of self-flagellation over what we "should" have done is mostly worthless... if we COULD have done better, we WOULD have done so.
posted by julthumbscrew at 1:39 PM on June 16, 2014 [3 favorites]

I closed out one of my 401ks during a period of unemployment (about $7k worth) and it meant I could take the better but lower-paying job rather than the horrible 80-hour/week job. No regrets, and I deliberately keep two 401ks these days rather than rolling one into the other just in case I have to do it again.
posted by restless_nomad at 2:16 PM on June 16, 2014

My company matches $.50 for each $1 I put in. So even if I plan to take it all out, it's better to contribute, and then pay the penalty and taxes. (Although I haven't.)

I withdrew from a retirement account for my first house. I was financially-naive and the money was actually for my college fund (my parents messed up on the type of account). I didn't know about the taxes thing (just the penalty). And it was just enough for me to put 3.5% down on a house. But that was 2011 and my house has since risen over $100k in value so no regrets. (Though I did get lucky and I'm pretty sure I'll try avoiding doing that in the future.)

I took a 401k *loan* to pay off a bunch of credit cards a year after graduating from university. That was great. I paid it all off much more quickly and it's just psychologically more satisfying to see 0 on your credit card statement and have the 401k loan repayment automatically withdrawn.

I used a 401k *loan* to buy a second house so that we could shorten our commute. We ended up moving back to our first house and renting out our second house, but I don't have regrets regarding the 401k loan. Paid that loan back within 4 months. The house is rented out enough to pay the mortgage. And the neighborhood is becoming more popular.

And then I took out *another* 401k loan to buy a tiny plot of land by the mountains so that we can build a vacation home. Still paying that back. And we haven't started building there yet. So I have yet to decide if this was a good idea. On the other hand, the value of the lot may have risen by 50% since our purchase, if the comps are to be trusted. So I don't think I'll regret that either.

The last thing I can think of is some people plan this years ahead. You can roll over some to a t-IRA, and then roll over to a Roth IRA, and then wait 5 years, and withdraw it. You pay income taxes at the time of rollover between t-IRA and r-IRA, but you don't have to pay the penalty. This is not applicable for most people though. Also, I'm not a CPA, so please do your own research.

So yeah, in general, I'm the type of person who says: Don't ever take money from your retirement account! (Do as I say, don't do as I do.) But it really depends on the details of your circumstances and your plans to "catch up" or pay repay your loan.
posted by ethidda at 2:18 PM on June 16, 2014

About five years ago I took a few weeks off from a job I hated, that had me in tears every night for months before I snapped. When I came back, there was mysteriously no work for me, and so technically I was laid off. I qualified for unemployment, but that didn't last forever, and so when it came close to running out I cashed out my 401(k) so I could still pay some of my rent and bills. It was just over $5000 at the time.

Do I wish I still had that $5000 earning interest in a 401(k)? Absolutely. Do I regret getting to pay most of my own way back then instead of depending on the kindness of friends for over a year? Not even a tiny bit.
posted by kythuen at 3:58 PM on June 16, 2014

I cashed out my old 401k to buy our house. Hubby and I both make a decent buck, but had trouble building up a down payment/closing costs because our rent and associated costs were so goddamn high. We also had issues with the old apartment in terms of parking, noise, location, management receptiveness, etc. It wasn't a bad place to live by any means, but the house is SO much better.

We love our house. Love love love. We also pay less overall in mortgage and associated utilities now, and have double the space. I don't regret it one bit. We've also now managed to build up a decent savings for home improvements and the occasional "rainy day".

Plus, I'm looking forward to next year when we a) don't have the penalties on our taxes from the withdrawal, which equals larger refund, and b) we will be able to write off energy-saving home improvements and the interest paid on the mortgage, which will also equal larger refund.

Honestly, it really depends on what you'll be doing with it. If you're spending it on frivolities, that's one thing, and probably not a good idea. However, if you're using it to make improvements to your life, or bringing a significant change that will lead to something better, then go for it~
posted by Verdandi at 5:29 PM on June 16, 2014

i took a 401k loan to put more money down on a new car as the interest rate on the loan was much better than the finance rate. however, things happen and i never bought the car. i did however purchase an engagement ring with 2/3 of that money. do i regret that? never.
posted by ps_im_awesome at 8:20 AM on June 17, 2014