A former employer went public and I would like to take the procceds from that 401K to pay off 17.5 % car loan?

Question

I made $20k on one day in my old 401 k. In the same week, my car was repossesed. I paid the back payments to get caught up, but I struggle to make the $414.00 payment. I owe just over $13k on the car worth $8k.
I have had my electricity turned off twice in the past 8 months due to non payment..
Does it make sense to take money out of the 401k to pay off the car? My currently employer puts 15% into my 401(b) account, and I have a fixed benefit pension from a long ago employer. Even with paying off this car from the 401k that just went public, I will have about 12k in that account when I am done (assuming I take out 35% withholding to cover the penalties and normal income tax from the withdrawal).
I am a single dad paying rent, child support and I do not live extravagantly at all. I have a medically fragile child with some medical bills even after insurance.
I am 46 years old and plan to work till I drop dead!

Answer 1

Normally I'd say no, don't take the money from your 401K, but it sounds like you're in a pretty deep hole financially, so even with the 10% penalty you'd pay, it might make sense for you to do that. If you have 35% withheld, it should cover your tax liability unless you're in a high bracket.

See first if you can take a loan against your 401K, if you'd be able to make the payments. But if you just can't do it, then taking money out, if it's allowed, might make sense. If you have to take the whole amount out, be sure to roll anything you don't need into a rollover IRA so you don't have to pay any more tax than necessary.

Good luck.

Answer 2

Well we all got financial problems. Just the guy I passed with the tin cup.

I don't know a lot, but I would. Then I would put the car up for sale before I need to.

Answer 3

You will pay a nasty tax penalty for pulling that money, but 17.5% interest trumps that. Take as much as you need to pay the bills, but not a cent more.