Please help me convince my boyfriend not to cash out his 401K..?

Question

He is in a lot of credit card debt, and is changing jobs at the end of the year. Please list all the cons to this. He wants more financial freedom & to be free from his debt but I know he has better options that this! He is convinced he is getting a large sum of money as an inheritance so he doesn't need to worry about retirement, so what are the cons besides losing this money he has saved up?

Answer 1

Well probably the biggest is that he will give a huge part of it to the government in taxes and early withdrawl penalties.

I would suggest to him the following.

First if this is credit card debt, you can call the credit card companies and make arangements to pay back the money at a lower rate if you need help. You lose the use of that credit card but you don't want to add to this debt anyway if your trying to pay it off. That way they still get their money which is much better than filing for bankruptcy.

The other reason is that you don't really learn anything from it if you just pay it all off in one big lump sum and he will be tempted to use the credit card again, causing the same situation to occur, but now he will have lost the money in his 401K. Paying it back slowly and getting use to not using the card will help teach him better how to manage his debt so he does not get into trouble so easily again.

Now if neither of these are enough then there is one other thing he can do. I would wait until after he has started his new job and has rolled over the 401K to the new company but then most 401Ks allow you to take a loan out against the 401K. Rather than cashing it out he should consider taking a loan out from his 401K and paying off his credit cards. Yes the 401K load will have an interest payment tied to it but the good thing there is that your actually paying the interest to yourself. This helps partially offset any lose in the 401K if the 401K appreciates while the money out for the loan.

Otherwise again if he cashes it out probably about 38% of it will go to the government in taxes and penalties and maybe even more.

Answer 2

Since he's so sure he'll get the inheiritance you will not be able to convince him not to do this. It will only end up causing you relationship problems.

But, that being said..here's why you shouldn't do this....While things may be tight for a few years, you CAN pay off the debt without cashing out the 401k. Doing so is only the easy way out and will simply mean that he'll run up his credit card debt again because he hasn't had to work to pay it off. AND most importantly...for every $10k in 401k money that he takes out he costs himself $125k in retirement money at age 65. Even if he pays only the minimum on the credit card debt it will be paid off before he's 65 and he would have paid less on it then $125k. So it's a bad short term and a bad long term financial decision.

Answer 3

By gawrsh, No. You can do it, yes, you can. But.....you not only lose the momentum of your investment in your long-term plan, but you lose REAL dollars now! You don't get to take out the unvested money. Only vested contributions (or your own salary deferrals). The penalty is that you pay regular income tax on the amount you withdraw. THERE IS NO PENALTY of 10% for first time homebuyers. So if you are in the 25% bracket, YOU LOSE not only the $1750 now, but you lose the GROWTH of that $1750 for the next 40 years. (BTW, at a nominal 10% growth, you're giving up $95,000 future dollars!) If you have decent credit, you can oftentimes get 100% loans or in some places 105% loans. While the money is expensive, usually you'll find that your income will increase over the next few years rapidly and it'll feel like nothing soon. One day, you'll even refinance or sell the house--long before you pay off the 30 year mortgage over the whole 30 years! My advice: KEEP YOUR RETIREMENT MONEY OFF LIMITS (til you retire, that is!) The WealthBuilder Tax Specialist

Answer 4

I guess it depends on how old your BF is. If he's still in his 20's it actually might not be such a bad idea for him to cash out his 401(k) to get out of debt. He still has another 40 years or so in the workforce- plenty of time to rebuild his retirement savings. Besides, if he gets out of debt now, he will have more money in the future to contribute to his 401(k) or maybe invest. He shouldn't bank on the inheritance if it's not a sure thing, though. MAny a relative has been surprised at a will reading when they find out they got absolutely nothing, or when they find out their inheritance was a lot smaller than they thought. But, like I said, as long as youth is still on his side, it really makes more sense for him to clean up his financial problems now, or else he'll just end up using that retirement money to pay off loans and such anyway when he's old.

Answer 5

Ooh, bad idea. Cashing out 401K is the worst thing he could do to destroy his financial freedom. This is his nest egg and he should invest in it continuously and wisely. If your boyfriend has lots of debt, he should meet with a credit counselor to consolidate his expenses into a reasonable payment plan. And, most important, prevent him form getting further into debt. This means no more plastic cards! It is so easy to put charges on credit, but it is difficult when the bill is due.

Answer 6

SUCH A BAD IDEA!
I know someone who only borrowed from it, and that was several years ago. She is still suffering from that decicsion. It hurts you. It may be a short term( and I mean short) solution, but in the long run, he has no idea what that could do to him. You should have him talk to a finiancial advisor if he is looking into more financial freedom.

Answer 7

He'll have to pay tons in taxes!

Answer 8

while it is in the 401 no one can touch it,,,,,,,,,,,,,,,,no bill collectors, etc,,,,,,,,,,,,,,,inheritance,,,,,,,,,,,,,,people change their minds,,,people get sick and use the money up........it's not a sure thing ever