Why can't I close out and withdraw from my 401k? Any way out?
June 9, 2008 7:02 PM   Subscribe

I want to close out my 401k (and pay the necessary taxes) so I can pay off some debt. My 401k says I'm not allowed. Why not? Can I change anyone's mind?

I have relatively minor credit card debt n. I have meager 401k savings n. (I am only 23). I would like to pay off my credit card, and be putting the money I'm currently putting toward monthly credit card payments toward more immediately accessible savings. Additionally, my company has as of last month decided to start matching 401k contributions, so I'd rather be putting matched money in than letting the $n sit there doing not much in the stock market while I continue to accrue credit card interest. However, I can't put money in until I'm not worried about paying off credit cards.

So I called my 401k people (Fidelity) to ask to take the withdrawal. They said I can't. I said, are you seriously telling me I can't have my money? And they said that since I'm still at my current company, I can't do anything with it until I'm fired or leave voluntarily. I've got a while before I'm planning on either of those. What the hell? It's my money, isn't it? We wants it :(

The other option is to take out a loan, but I'm only eligible to take out loan n/2, and paying back loan + interest plus paying off the other half of credit card debt won't really solve my problem. My goal is to wipe out the debt, be able to start contributing small (matched) amounts to retirement, and separately do a better job of keeping an accessible savings account with monthly contributions.

So, question 1: Why can't I take out my money? What's the reason behind this? And is it likely that by arguing in a different way I could get it? I'm fully aware of and willing to pay the necessary taxes if they'll just let me get at the money.

Question 2: Any other options for what I'm trying to do?

(Anonymous because I don't want this connected to the real name I use on here)
posted by anonymous to Work & Money (13 answers total)
You can't take a withdrawal now because your plan rules won't allow it. This is common in 401(k) plans. The philosophy behind the rule is that tax-deferred savings are to fund your retirement, not to meet your short-term income needs.

The IRS rules do permit 401 (K) plans to allow participants to take in-service withdrawals (meaning withdrawals while you're still working with the company) after two years of service. So you can write a letter to the Plan Sponsor (get this address from your HR department) and ask them to change the rule. In all likelihood, you'll get a big fat "no" in response. Many retirement plans look disfavorably on this type of request.
posted by bananafish at 7:15 PM on June 9, 2008

My plan allows for hardship withdrawals but doesn't advertise it. Call your HR dept to find out if you can take out a hardship withdrawal (and get all the details on what happens after you take such an action).
posted by amcorona at 7:47 PM on June 9, 2008

In general, I'd recommend against taking money out of your 401(k) for anything less than an actual emergency. Without specifics (it's anonymous, why can't you give an order of magnitude on n?) it's hard to say if you're in the small boat of people for whom this isn't a bad idea. Unless there's something major you're not disclosing, it's extremely unlikely you qualify for a hardship withdrawal.

For starters, you're looking at a 10% penalty up front in addition to the taxes you'd have to pay, so if you can find a loan from any other source that you can pay back in a year with less than 10% interest, you should go with that route instead. You might be able to get a secured loan against your car or other large asset, get an unsecured loan from a bank that really likes you, or try a peer-to-peer lending site like Prosper.

The best route is to probably just to contribute whatever you can to get the matching funds, and put the rest towards your credit card debt (assuming this actually pays them off in a reasonable time frame). Taking money out of the 401(k) at a significant penalty just to put it back in again rarely makes sense.
posted by 0xFCAF at 7:56 PM on June 9, 2008

Taking a loan from the plan sounds like the better idea, as long as your employment appears stable for the term of the loan.

I agree that freeing up net income to get that sweet match is a very important goal.
posted by tachikaze at 8:21 PM on June 9, 2008

Taking money out of the 401(k) at a significant penalty just to put it back in again rarely makes sense.

Actually dollar-for-dollar it makes perfect sense to take out n*.9 to put back 2n, even with the double income taxation of the original n, assuming there is no other way for the poster to make the match.
posted by tachikaze at 8:25 PM on June 9, 2008

Hardship withdrawals are generally not available for paying off debt - most plan documents specify that hardships are available for things like medical bills and to avoid foreclosure on your primary residence. Thus, hardship. And yeah, you really cannot close out your 401k until you leave your current employer; I'd suggest the loan route, if your plan allows it (again, a lot of plans restrict loans for things like house down payments and car payments).
posted by pdb at 8:45 PM on June 9, 2008

The government allows you to put savings in a 401(k) plan for retirement without paying taxes. In exchange for this retirement benefit you give up certain rights to your money. One of these is that you can't withdraw the money before age 59 1/2 with certain hardship exceptions. Some of these exceptions are for medical expenses, to avoid eviction or foreclosure, to pay college tuition, or for funeral expenses. Paying off credit card debt would not generally qualify.

Even if you could take the withdrawal you would have to immediately pay income taxes on the amount, say 25%, plus an additional 10% penalty. So more than one-third of the money would be gone before it even got into your hands.

You could take a loan from your 401(k), but the risk is if you quit or are laid off the loan must be paid back immediately or else you must pay all income taxes and penalties.

Borrowing from a 401(k) should be a very last resort in an emergency. You are better off taking every spare dollar you have and paying off your credit card directly. Depending on your credit card rate, you may be better off paying the minimum on your credit debt up to the amount that still allows you to get the matching contribution (free money) in your 401(k).
posted by JackFlash at 10:29 PM on June 9, 2008

I have relatively minor credit card debt n.

Why not apply for a 0% credit card and do a balance transfer? That will give you breathing room to make smaller payments until you can get your finances in order.
posted by Blazecock Pileon at 11:00 PM on June 9, 2008

Your plan is doing you a favor. Keep your savings and find another way to pay down the debt. Even if you could take your retirement money, they would charge you a hefty penalty. That just does not make sense. Maintain your savings and live on less in the short term to pay down your debt. Most of us have something we can give up. If you are eating out any meal, that is the easy one right there. No one in budget difficulty should be eating at restaurants.
posted by caddis at 12:59 AM on June 10, 2008

Why not apply for a 0% credit card and do a balance transfer? That will give you breathing room to make smaller payments until you can get your finances in order.

Maybe because if they could do that, they would have already? I mean, the poster said they could only qualify for a loan of n/2.

Plus, credit card transfers will generally accrue a 3% balance transfer fee.
posted by delmoi at 7:39 AM on June 10, 2008

Maybe because if they could do that, they would have already? I mean, the poster said they could only qualify for a loan of n/2.

Is that from a loan or from a 0% credit card?

Plus, credit card transfers will generally accrue a 3% balance transfer fee.

Whatever that fee is, it's lent at 0% interest, which gives time to make smaller payments without compounding debt. A 3% transfer fee will be overshadowed by 14-22% compound interest, after the first couple weeks.
posted by Blazecock Pileon at 11:21 AM on June 10, 2008

Also, the interest paid on your 401K loan is paid to yourself. It's still not ideal, but might be better than taking it all out (which you can't do anyway). Here's a site that talks more about the tax implications for that (And can also Google 401K loan): http://www.moneycounts.biz/testyourmoneyknowledge#faq2.

Of course, everyone's situation is different, but it might be worth it not to put the money into savings and just keep paying the credit cards. What's the most you can get on a savings account, like 4% at some of the online places? If your ccard interest is more than that, it could be worth it to just keep paying of the cards.
posted by unsigned at 5:07 PM on June 19, 2008

QUESTION: Chad and his wife have $35,000 in debt between credit cards, student loans and car loans. They bring home $150,000 a year. They also have $25,000 in their 401-K savings. He wants to (pay off his debt). Should they use that money to eliminate their debt?

ANSWER: You should not take the money from your 401-K to eliminate your debt because $14,000 will go to penalties and taxes – that’s 40% of your savings. It’s like taking out a loan with 40% interest to pay off your debt. That’s a bad plan.

Live on less for one year, get on a written budget, and you can have it all paid off in less than a year.

I would never cash out retirement savings to pay off debt unless it is to avoid foreclosure.

Courtesy of DaveRamsey.com

You should start listening to his podcast. He's a little crazy with the religious stuff, but the money stuff makes perfect common sense.
posted by hipersons at 9:51 AM on August 19, 2008

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