What should I do with my 401k plan when I leave my job?

Question

I am aware of of the penalties. I wanted to pay off my debt of 13,000.00. My 401k plan has 17,000.00. Is this a good idea ? Thanks for any input

Answer 1

You won't be able to pay off your debt with what you have now in your 401k. First of all, you can't get all of it out unless you can prove that you have a hardship. Secondly if you can get all of that out then there will be penalty which you are aware of and additional tax added on top of that.

If you have to get it out then get it out but be aware that you won't get the same amount as have you have now. They have those online calculator that you can use. Plug in 17g and calculate how much you will get in return when you are near your retirement. The number will convince you not to pull it out.

Answer 2

For a dollar to dollar value comparison you may want to consider something else. Withdrawing your 401k is usually going to cost you 20% tax and 10% early withdrawl penalty. Meaning that your 17,000 is really only $11,900 if you take it out now. Which doesn't even cover your 13k debt obviously. So unless you are paying more then 30% interest on you debt I wouldn't recommend it.

The best thing to do in my opinion, and actually I'm facing the same decision right now, is to leave it in the account and then try to roll it over to your new 401k when you get a new job. Which will be dependant on the new companies policy. If they don't allow it, roll it into an IRA and continue to let it collect interest. You may not be happy with that today, but you will be real glad you did it 20 years from now.

Answer 3

The correct answer has been stated many times...but the facts are a mix of all the answers. If you take the 17k they will automatically withhold the 20%. So, you'll get a check in the amount of $13,600.00. Which is enough to pay on your debt. However, the 10% excise tax will be assessed when you file your taxes (assuming you're not age 59 1/2) so come April 15, you may need to come up with an additional $1,700.00. NOW, knowing that the assessment is coming, you can modify your exemptions on your w-4 to account for that over the next 11 months. You're still paying it but you've paid off your debt AND taken care of the tax bill. So, it can be done.

But, should you? I say no. I'm making assumptions here but you can modify them and see for yourself in EXCEL. If your balance is 13,000 and your interest rate is 18% then you will pay off the balance in 6 years if you pay $300 a month on that balance. Now, if you aren't applying 300 a month then you lower your contributions to your 401k to get to that. Why? If you make your 401k contribuitons go to zero to ensure that you pay the $300 with no lifestyle change you will still have 276,000 in that account after 35 years. So your actual cost by taking that out is not the 17...but the 276k. Now it's a no brainer. But let's continue on.... If you took it out and started over by contributing $200/mth right now with a zero balance start you'd have 458k after 35 years. But if you left it in and started contributing after the debt was paid off in year 6 you'd have 552k. Again...clearly better to leave it. Essentially, this tells you that yes, you can catch up so that it seems like taking that 17k didnt' matter but it will take you almost 50 years of $200/mth contributions to do it. I don't think you plan on working that long do you?

bottom line is that if you make payments on that debt...it's got an end to it..it's finite and short term in relation to your retirement. But, if you pull out your retirement you have to look 30-35 years out and that's a lot of compounding you're missing out on.

Best thing for you to do continue to contribute to your current plan only to the amount to get the match. Everything else should go to the debt..get it paid off as quickly as possible. Then start putting that debt payment back to the 401k...(you've already gotten used to living on that level of income).

If you absolutely feel that you can't live with the debt..then switch it over to your 401k. Take a loan from your 401k and pay down the debt. People will tell you that's a bad thing to do and it can be...but so long as you pay it back and don't take a distribution then it's damage is minimal. And, it's possible to rollover a loan. Just not many people know it and even fewer do it.

Answer 4

Roll it over into a ROTH IRA to avoid penalties. That would be best. You will not have enough left after cashing out to pay off that 13,000 in full but you can put a dent in it. If you are in your early 20s it might be a good idea to cash out because you can start re-building your retirement up again fairly quickly but you should commit to staying out of debt after that. I'd hate to see you giving your hard earn money away to the government though.

Answer 5

Good thinking, but are the penalties greater than four thousand. 17,000 (401 K) - 4,000 (Penalties) = 13,000 (Pay off Debt)? Will you have a job waiting for you? If you have a job waiting, it will be best to rollover the 401k. If you will be out of work for a long period of time best to cash it in so that the collection companies don't bother you. Good luck!

Answer 6

You might consider reading some of David Bach's financial planning books. They are easy to understand and have some good practical advice. Do you have any other retirement savings? If you do, paying off your debt may be a decent idea. One rule of thumb could be to consider whether the penalty you'd pay is less than the interest you'll continue to accrue on the debt. Is it credit card debt or student loan debt or something else? Student loan debt tends to have pretty low interest rates, so in that case you'd probably be better off hanging on to your retirement savings. Best of luck to you.

Answer 7

Bad idea - if you cash out your 401K you will lose a ton of money in the process - as much as 40-45%.

If you're desparate then do it. But if you can wait, then roll it over into an IRA. That way you will get most of the money when you reach the distribution age.

FP

Answer 8

NO, IT"S NOT A GOOD IDEA to take money out of your 401(k) plan to pay off debt! Any money you take out of a savings plan like that will immediately cost you 10% in penalties, 20% in federal taxes, aand state taxes!! That money will be wasted--YOUR money will be wasted! DO NOT do it!

If you want to kill off your debt, go to www.GoldenRocFinancial.com (ro Amazon.com) and get "Kill Off Your Debt--and LIVE!" That book has a lot of great advice about how to kill off your debt quickly, and start preparing for making money with your money.

If you keep your 401(k) working for you, you can get 10%, 15%, even 20% return on your money while you pay off your debt.

Depending on how much you make, you can easily pay off that $13,000 debt in one year and still have your $17,000 401(k) making money for you. Talk with a certified financial planner or CPA about how best to invest your 401(k) money to maximize your returns.

You don't have to only use your 401(k) for mutual funds--you can invest in real estate, tax liens (if it's a self-directed IRA), and other investments that earn a good return with minimal risk.

Answer 9

Don't do it! you'll pay about 40% of it to the IRS. Roll it over to an IRA, don't take a payout and reinvest...according to the government you cashed it in so you pay taxes. Check out www.daveramsey.com and get into a Financial Peace University class near you. It will change your life. We paid off $42K in 3 years and now don't owe on anything but our house. It will give you a plan, and you'll be able to get rid of that 13K in no time!

Answer 10

Have it rolled into a traditional IRA by your bank. You can withdraw the money at any time, and you'll get a hefty penalty, but you'll avoid a few hassles of doing it yourself.

(Someone above said to roll it over into a ROTH. Don't do it. 401k's are similar to traditional IRA's. But then your bank would tell you that, too.)