I lost my job. No savings. Should I cash out my 401K or Borrow $12K from a Home equity line.?

Question

I lost my Job this week. Was living paycheck to paycheck. I have blls monthly about $4K and Unemployment will pay me about $2K a month. I need an extra $2K a month. I can either cash out my 401K ( I no loner work there so I have to withdraw the full amount) of $68K . With taxes I will lose about $30K but the $38K will last me quite a while OR I can borrow about $12K from a home equity line ( Pay interest only) I currently am borrowing $26K on that at 8.25% . I may never be able to pay back that money so I am leaning to taking out the 401K and if get work quickey put back as much as I can into a IRA plan.

Any thoughts on this??

Answer 1

I was always told that it's a bad idea to borrow against your home. What if you can't make the payments??? I'd go for the 401K, but put what you don't use into savings and concentrate on looking for a new, bigger, better, super-shiny job :) GOOD LUCK :)

Answer 2

You DON't want to take your 401k, especially if you have to take the whole thing. You lose the whole value together.

Here is what I would do. See if you can change your home equity line to a 5 year fixed rate of 6.85 - that's the going rate, you should be able to get a "no closing costs" one because you'll roll your current balance to the new bank. Get the home equity line with a checkbook, and each month, if you're still unemployed, write a check for the amount you need plus the "payment - thus, if the payment is $500, write a check for $2500, take the $2k to pay the bills and the $500 to pay the payment. If you get back to work quickly, you can reverse that and pay down more.

If you take the $68k out, pay $30k taxes, you may never have a chance between now and retirement to ever make that money up - if you've got 20 years until retirement, that $68k might be $200k, what a kick in the kiester that is to lose that money.

If you tap your entire line of home equity credit, you can always take your 401k as a last resort, pay off your line of credit and live on the balance, but that means that you've been unemployed for a LONG time (like probably a few years), so have a much bigger problem.

You can only put $5k into an IRA, and if you have a retirement plan you get little tax benefit from it, you'll never make up that hit from the 401(k).

Double check with who holds your 401k and see if they'll let you take a loan off of it - maybe the rules have changed?

Answer 3

WHOA....Wait. 1st Do not take money from your 401K. You are looking at LOSING 1/2 the amount you have saved for your retirement...It's not a savings account, You would be basically stealing from your future. Are you really willing to GIVE AWAY 38K??? (Essentially you doing just that)The second choice isn't good either -You stated that money was tight to begin with so there is no way you will be able to pay this back.

ASK YOURSELF WHAT CAN BE TRIMMED OFF OF THESE MONTHLY EXPENSES.Do you need to downsize to a smaller house/apt? You may have to live without cable, the gym etc. Skim all expenses (eat beans) and hit the pavement come Monday Morning. You will find another job quickly but don't make any quick decisions about borrowing just yet. Best of Luck!

Answer 4

Personally, I think it is a nutty idea to put something into your body that in time will cause you more surgery and more money, and incur debt against your home at the same time. Implants are not a one-time only expense. Eventually you will need to remove/replace them. And, you already have credit card debt, which is an anchor that weighs down your financial health. You do realize that if something happens to your income and you can't pay your HELOC line, you will lose your house, don't you? You want to bet your house for boobs? Do yourself a favor, learn to love your body as it is, and use the money instead to pay off the credit cards and build up your retirement savings. And, maybe use a little to donate to a charity so you can get a good feeling from helping others. The security of knowing you have financial strength will do a lot more for your self esteem and personal integrity than false boobs will do.

Answer 5

I would hate for you to lose $30K, but if you really feel that you could not repay the $12K you could be in trouble with your home. Could you cash out your 401K later after rolling it over to another account if you get in over your head with the equity loan? Then you could use it to pay it off. If not, then the 401K might be the best of a bad situation.

Answer 6

First thing you need to do is cut your expenses.

I don't see a bank loaning you money, and by your numbers, 12k will last you less than 6 months.

You are going to take a huge loss on your 401k, whatever your current tax rate is, plus a 10% penalty. If you are even remotely considering bankruptcy, as long as that money is in a 401k, it's safe. Once it's in your checking account however, it's up for grabs.

Answer 7

Call your 401k provider (the financial company, not your old job) - ask them about qualifying for a "hardship withdrawl". If you qualify, you don't get slapped with the penalties, etc for taking your money out.

It's generally better to spend money you have, rather than taking out more credit - especially if you don't think you'll be paying it back soon. And with the housing market slumping...you want to be careful!

Answer 8

You can roll your 401k into a CD at your bank without penalty. Your bank can provide you with the paperwork for this. If you do not find work quickly, you could then consider cashing your CD.

Answer 9

Whatever money you cash in(401k)might be deducted from unemployment!