Should You Cash Out Your 401(k) To Pay Down Debt?

401k - Should You Cash It Out to Pay Off Debt?


Note: This is a post from Joan Concilio, Man Vs. Debt community manager. Read more about Joan.

When I shared my monthly financial update last week (Big Decisions Involving Big Dollars), I said I had big news: Among other changes, I’d decided to cash out my 401(k) from my former full-time job.

It wasn’t an easy decision to make, and it isn’t without some serious ramifications. And here at Man Vs. Debt, it ranks among the most frequent decisions on which people seek our input: Should I cash out my retirement fund  (or other savings vehicle) to pay down my debt?

So, since I now have first-hand experience doing so, I thought it made sense to talk in depth about this topic – and to share some thoughts I have. Warning: If you’re expecting traditional financial advice, you might be disappointed. But if you want to know why I made the choice I did – and what we tell readers who ask us about this hot-button topic – read on! We’ll also cover whether to consolidate 401(k) accounts.

Cashing out a 401(k): What you need to know

In the United States, a 401(k) is a tax-deferred, employer-sponsored retirement plan. That means that your employer takes money out of your check, before it’s taxed, and deposits it directly into a specific type of retirement investment account. It’s got some cousins – 403(b) plans, IRAs, pensions – and all have different legal definitions and ways they can and can’t be used. I’m focusing mostly on 401(k)s today in a technical sense, but the decision-making process holds for more or less all of them!

Here’s the thing about all these plans: What goes in is not necessarily meant to come out. At least, not right away.

If you withdraw your money from a 401(k) plan before you’re 59 1/2 years old, except for certain particular “hardship” cases:

  • You’ll pay income tax on the money you cash out (meaning, you lose the tax-deferral benefit to this method of savings).
  • You’ll pay a penalty to the IRS of 10 percent of the value.

If you keep your money in the account until you’re 59 1/2 years old, when you withdraw it, there’s no penalty, but you DO still pay income tax.

So the difference here is the 10 percent penalty.

Under almost any circumstance, you cannot cash out a 401(k) account when you still work for a particular employer. This is an option only when you’ve left a position, and there’s often a delay between when you quit and when the money is available to you, if you do choose this route. (As an example, my last day of employment for 401(k) purposes was June 30, 2013, and I was not able to request the cashout until mid-September!)

I’ll share my exact dollar figures in just a few minutes – and explain why I was willing to take the 10 percent penalty. Mostly, I want you to first know the basics of what we’re talking about.

What we at Man Vs. Debt tell people who ask us about 401(k) cashouts

Here’s the thing. None of us here at Man Vs. Debt are financial professionals. We don’t give investment advice. What we can do is share the thought process we use to make decisions – and you can think about what works for you.

When people ask us about cashing out retirement savings, our big point is this: IT ALL COMES DOWN TO MOTIVATION.

Here’s the question we ask our readers: What will motivate you most to GET debt-free and STAY debt-free? 

If someone writes to us planning to take a cashout, the advice we give is to use ALL of it to attack debt. Not most, not as much as possible, but not a cent to anything else.

We’ll tell you this: Take a look at your Debt Tsunami, hit the debts that tick you off the most, or that free up the most cash in a month when they’re gone, and obliterate them.

Then, take the money you’re NOT paying on those debts – again ALL of it, not just some – and put the same dollar amount for maybe 2 or 3 months into a savings account/emergency fund of some kind. Our biggest concern for readers who  end up being able to pay off debts using “big” methods like this is that, if you haven’t built the habits and the foundation, you’re going to end up charging the next thing, and then you’re no farther ahead.

And then finally, after you’ve paid off some debts or knocked down the balances, and put the monthly payments amounts for the now-gone debts into savings for a couple months, you’d then want to pay that same amount each month onto any remaining debts. It’s not a magic bullet – even doing that 100% faithfully, it could be years til people with the kind of debt we’re talking about are 100% debt free.

But IF you can stick to it, you can make a lot of up-front progress and free up some cash flow to build an emergency fund.

Is it always the right thing to do? Absolutely not. We’ve heard too many stories of people who want to cash out to get that “once in a lifetime” vacation, or to pay for their dream wedding, or any number of other things that are absolutely fun, but absolutely not NEEDS. In those cases, we tend to strongly caution against a cashout. Age is a factor, too. MANY of our MvD readers are our age – late 20s, early 30s – or younger. In the case of readers who are closer to traditional retirement age, our advice takes time and risk into account as well.

But when it comes down to cashing out retirement savings to pay off debt, in general?

Our short answer is to decide what motivates you most. If it’s the highest dollar amount in the bank a few years from now, maybe keeping things as-is (still building a modest emergency fund, by the way, before paying down any debt!)  is the better fit.

If making some short-term progress quickly and getting some cash freed up for more aggressive debt repayment on the remaining balances motivates you more, then maybe cashing out is the choice you make!

Either way, the pledge has got to be NO NEW CHARGING!! I believe whole-heartedly that this only works in conjunction with a debt-free-for-life plan.

Why I chose to cash out my 401(k)

A while ago, I tackled the question Are 401(k) and 529 Plans a Good Idea When You’re in Debt? When I wrote that, I said managed savings vehicles are not, in general, my first choice for investing or saving for the future. They weren’t – and they still aren’t. There are many people for whom retirement accounts are a great choice. I’ve never been one of them – despite having at some past points an incredibly high-yield 401(k) account.

I’m 100% intending to save for retirement. I’m just choosing to focus on motivation above all else – and trying to find ways that allow me the best chance, over time, of having the life I want – now AND in the future.

My exact retirement amount balance at the time of cashout was $34,507.26.

Of that, we had about 25 percent withheld off the top – 15 percent for standard income taxes (this is intentionally low, and I’ll explain more in a minute) and 10 percent for our penalty.

Our total disbursement was $25,605.81.

We specifically have been overpaying our estimated taxes this year. We’d been doing that intentionally and at the advice of our accountant, and at the time of this withdrawal, we were days away from paying our third-quarter estimates, which had already been figured to take into account the money we’d owe from cashout.

That’s why our accountant suggested the off-the-top withholding she did. She knew what we’d already been putting aside and didn’t want us to give the government any more of an interest-free loan than we had to!

Once the money arrived, our first step was to pay our third-quarter federal, state and local tax estimates (goodbye, approximately $4,900!)

Then, we put three big chunks of money into a particular savings “bucket” – one for the fourth-quarter estimates, one for the second half of my tae kwon do master’s program payment, and a final sum to bring our emergency fund back up to the equivalent of one month’s mortgage payment. That was another $8,800 in all.

401(k) cashout money remaining: $25,605.81 – $4,900 – $8,800 = $11,905.81

Now here’s where our situation gets interesting. We are also facing a pair of job changes. I will (likely) be returning to full-time, non-contract work, and my husband, Chris, will likely be freelancing, as of about the beginning of December. It is likely based on projections that our income will remain the same or increase during this time, but there are some particular expenses we’re aware might occur.

This is where we deviate from the standard Man Vs. Debt advice, and I want to be as clear as I’m able to be about why. Our situation is a little weird. I’m as 100% transparent as I can be, but with job offers on the table, there are certain things I can’t discuss. Specifically, just know that if we had been able to, we’d have made certain decisions first before cashing out (and hence, would have followed the advice to have a plan and spend the money ONLY on that plan), but that option was likely to not remain available beyond a certain window.

So we’re doing the best we can by putting the money aside in savings until we hammer out the following moving parts.

Our biggest issue is our vehicle. We’ve only got one – and the viability of that as a solution VERY MUCH depends on what career choices we end up with. One strong contender would have me working about 2 hours from home in an area lacking public transportation. Have I mentioned that my car has… needs? It’s got 130,000 miles on it already, and we’re prepared to put at least another 70,000 more on it, but probably would prefer not to do so in the course of, you know, a year.

We’re also beginning to weigh the possibility of relocation. Our house is not underwater – JUST BARELY. We’re not going to profit on it if we sell it, and that’s the largest factor weighing against a possible move right now. (See also, Renting: The New American Dream. Or, why Joan is sorry she bought and then refinanced a home during the housing bubble.) So, if we were to move, we’d have to be able to do so without assuming any proceeds from the sale of this home.

Finally, there’s the debt. Remember that – all $55,000-some of it? So, we have this 401(k) money left. Almost $12,000. A lot – but not enough to knock out our highest and most high-interest debts. We could use it to attack the smaller debts, but they have favorable APRs – and our hatred of BoA is SO GREAT that we can’t imagine putting the money toward anything but that. That said, we could knock a huge chunk off the remaining $16,205 BoA balance – and probably have the rest paid off in a handful of months!

Right now, our move was to put that excess 401(k) cashout money into a separate savings bucket. It’s earning some interest (not investment-level interest, but again, our timing was limited due to factors beyond our control). Our plan is to spend November hammering out our employment situations and choosing the options that are the best fit in that area.

Then, the plan is, if we need it, use the money to pay cash for a decent (better than our current) car that would become our primary vehicle. If we can avoid that – and we’re scoping out as many options as possible to do so – then our next plan is to send a HUGE pre-Christmas payment to BoA! And if we should choose to relocate, we’ll factor that in as well.

All that said, I understand that I’ve made the choice to give up more than $3,500 of my money in PENALTY FEES. That’s true. But I know what motivates me – and our family. I know that it was the right time for my husband to leave his job. I believe it’s the right time for me to pursue some opportunities that have come into my path.


Considering a cashout? Take these steps

1. Talk to a tax professional.

Go armed with the exact balance in your account and as detailed of a set of current financial records as possible!

We would not have proceeded with this cashout without the guidance and counsel of our accountant. The hour-long consultation we paid for allowed her to forecast our income for the year, the total money we would need to withhold for taxes (for the cashout and otherwise) and how we could best put ourselves in a good position overall (including in what tax year to proceed with the withdrawal – all signs pointed to doing it before the end of 2013 in our very specific situation!) She recalculated our estimated-tax payments, made suggestions on what to withhold at the time of the cashout, and more.

This was well worth the $55 for the consultation. To be radically clear – we would not have proceeded with the cashout if we’d gotten a red flag from our accountant, who I’ve worked with for more than a decade and who I trust implicitly. If you don’t have such a relationship, this is a little harder, but still VERY MUCH a must-do.

2. Don’t let the money touch your general fund.

ANY time we get any kind of “windfall” money – really, any type of lump sum, whether a tax refund, a large gift, a bonus, etc. – we make sure it goes directly into our savings account. If it sits in checking, even for a week or two, it’s way too easy to nickel-and-dime it away with an extra lunch out here or an extra pair of shoes there!

That’s one thing we’re particularly proud of. We moved the entirety of our 401(k) cashout to savings – and, in fact, to a couple different savings “buckets” so we knew what we had available to us for planned expenses, like taxes, vs. other purposes.

3. Have a specific plan in place to rebuild or build a retirement savings/income account.

Not needing or wanting a 401(k), in our case, is definitively not the same as not wanting to retire!

I’m 30. I have a one-year plan, a five-year plan and a ten-year plan to first tackle our consumer debt, then to fund any needed higher education expenses for my daughter, Sarah, who is 13, then to live mortgage-free (either in a paid-off home or via renting, depending on circumstances), then to begin fully funding a large-scale “retirement” account.

I say retirement because that’s what people understand, but my plan is not to work full-time for many years and then stop working.  My interests are such that I will freelance and consult as long as I possibly can, but I am happy to say my long-term goals include enough money in savings and investments that I won’t need to work to pay the bills – which, in turn, will be modest, because I intend to stay FULLY debt-free once I become so!

Have a plan for retirement. If you’re going to cash out, don’t just say, “Well, I’ll start over later.” Have a date. Have goals. Set Very Next Steps. Cashing out CAN work, but only if you have a plan for the future.

4. Use this strategy only in conjunction with a debt-free-for-life mindset.

I said it before, but it bears repeating: If you don’t have a plan for getting out of debt for good, a windfall (whether it comes from a cashout, an inheritance, the lottery, whatever) is not going to change your life. The money will be gone, and with no system in place, you’ll charge the next big problem that comes your way.

That’s not the point. If you already have a plan in place, a cashout CAN work for you.

You need to, at a BARE MINIMUM,  be in the black every month with your budget before you consider cashing out. If you’re not making ends meet, a cashout is not an easy fix – at some point the money will be gone, and then what?

If you already are working a plan, though, and can get farther faster using the guidelines we talked about above, THAT becomes a point when a cashout might be worth considering.

More perspectives on 401(k) cashouts

I said at the start of today’s post that my thoughts run counter to some pretty big traditional financial advice, which tends to be HEAVILY focused on math over motivation. (That’s not bad – it’s just not “me!”) One thing I would love to encourage you to do, though, is to read a variety of perspectives on the subject. Here are a few, and I’m sure you can find dozens more – even though I might not agree with all the points contained in these, they’re WELL worth reading.

More Than 25 Percent of Americans are Making a Huge Financial Mistake: In March 2013, Trent Hamm on The Simple Dollar came down solidly against cashouts for almost any reason. In fact, he says, he’d rather take a credit-card cash advance than an early withdrawal (though his point is that both are disastrously bad ideas, not that he’s in favor of such advances!) My take on this is simply that I agree – if you’re not planning to be debt-free for life and to fully fund your retirement savings in some way, it’s a terrible idea. (And I also agree that it’s NEVER something to do to fund a “treat” or because of poor financial planning.) And, interestingly …

Emptying Out a 401(k) To Pay Off Credit-Card Debt: … in this earlier post (from 2007), Trent gave generally the advice I’m sharing here: That sometimes motivation matters more than mathematics, and that in certain cases, cashouts can be a long-term help as well as a short-term one. I find this version of Trent’s thoughts to be some of the most sound advice I’ve read on the topic – and much more succinct than my own. 😉

Why You Shouldn’t Cash Out: Famous money guy Dave Ramsey compares the 35-percent-plus tax hit to taking a loan at 35 percent interest to consolidate your debt, and says it’s never a good idea. I’m not saying it’s always a good idea (see above!!) but I disagree with the math here. Only 10 percent of the money you pay in taxes to cash out a 401(k) is a penalty. The other is simply tax on that income based on your tax bracket (25 percent in Dave’s example). If I could earn an extra $30,000 next year, would Dave suggest I shouldn’t do so because I’d have to pay 25 percent of it in taxes? Probably not. So at best, I’d say it’s like taking a loan at 10 percent interest. Hmm. Suddenly that sounds a little different. Especially since my BoA card has a 22.99% APR…


Let me be super-clear that cashing out a 401(k) is NEVER a blanket yes-or-no move. There are dozens of factors to consider, from motivation to mathematics to age to lifestyle choices to the job market.

My goal today is not to “convince” you to make or not make such a move. It’s simply to provide an alternative way of thinking that sets up a responsible framework IF you think it might be for you.

I realize many of you will disagree – and that’s OK! My interest is in hearing how you’ve handled similar decisions – and what resources you’ve drawn on to help make those difficult choices. That’s what I want to build here – a growing list of things to think about!

I can’t wait to hear your comments!

120 thoughts on “Should You Cash Out Your 401(k) To Pay Down Debt?”

  1. Thanks for this post. It has really got me thinking.

    Any thoughts on cashing out a retirement account to completely pay off a rental property? The rental property would then be an immediate source of passive income from now until death.


    1. Sarah, talk to a local professional about any decisions. However, it’s extremely unlikely you’ll want to take a penalty to pay down a mortgage on an investment property. I’d encourage you to keep things how they are unless a local, trusted advisor views your whole situation and shows you advice to change things. 🙂

  2. Just one caution to your readers who may be in significant debt and/or on the brink of bankruptcy:

    DO. NOT. CASH. OUT. YOUR. 401k.


    Quite simply, 401k/IRA accounts, so long as they REMAIN in 401k/IRA accounts, cannot be touched in bankruptcy. That’s right — you could have $25k in credit card debt, $1 million in a 401k, declare bankruptcy, discharge the $25k in credit card debt, and still have the $1 million in a 401k (albeit with a big impact to your credit score, and/or any other, non-retirement assets you have).

    When people are faced with financial crises (medical bills, loss of a job, etc.), they frequently raid their retirement accounts, even when they have a safety net of family they could move in with (permanently or temporarily), or could downsize houses, or could find a less well paying (but still paying) job and live more frugally. This is the WRONG idea. That retirement money’s safe, even if the worse (bankruptcy) happens to you. Touching your 401k is always a bad idea in my mind, but NEVER do so if after doing so you’ll still be close to bankruptcy — it’s better to just declare bankruptcy and KEEP your retirement money.

    1. Wow, I had no idea this was the case. Thanks for sharing. I was already of the belief that cashing out a retirement account should be an absolute last resort, but this really puts that nail in the coffin for me.

    2. I will back this up 100%. If you are in a overwhelmingly negative situation – or considering bankruptcy – don’t do anything until you consult a local, trusted professional in your area.

    3. I think that’s a very valid point. The 401K is like the ultimate safety nest, but what if we find a compromised solution? We take out the money to pay off the debt, and then start putting money into the account again. Of course, if one took out the 401K funds to pay off all their debt, they wouldn’t be declaring bankruptcy…

      Is there a chance we’re missing out on financial comparison of both the situations when making this decision? If the interest rate you pay on your current debt, along with the principal, is greater than the capital gains on your 401K, then perhaps you should take out the money immediately because otherwise you’re net worth will reduce over time. I’m no financial expert, and I may be wrong here. Perhaps someone else could explain this a bit.

      1. I agree with you. If your return on your investment is not significant and your debt is much higher than you might be better off paying that debt first and then may be start saving for the retirement. If does not make sense to owe money when you have the source to pay it off.

      1. Joe! Finally someone with some common sense! If a person is in debt (whether great or small), you have obligated yourself to paying back those you borrowed from. It really is dishonest to declare bankruptcy just because you’re in a difficult situation. The problem is that if everyone declared bankruptcy then it collapses the whole system. Of course maybe that would be a good thing, it would make debt a much pricier option.

  3. I have a hard time understanding how this is a good long term decision. It seems that you are treating your tae know do masters program as a “need”, when it fact it should fall into the same cateogory as a vacation or other “wants”. It seems to me that you’ve taken ~$34,000 and turned it into $12,000. I know it makes a big dent in your debt, but that’s a terrible idea by any measure. Maybe there are some details that you aren’t able to reveal which would make it make more sense, but this just seems like a bad, bad idea.

    1. I realize I didn’t explain that in as much detail, and I apologize (and am glad you mentioned it). It turns into kind of a semantic thing – for my tae kwon do, we actually had (and had already been paying with) money budgeted from our monthly budget for that “want” expense, and chose to take the cash and sit it aside now instead to clear out that monthly category in the budget. So it’s coming out the 401(k) money in a way, but it’s not – and the same with the taxes, which I think another commenter raised. We ALREADY had that money accounted for in our monthly budget. However, we chose to “prepay” that expense by sitting aside a lump sum, therefore freeing up more money in our month-to-month budgets just during this transition period.

      That’s a VERY good point and one I’m glad you made! (And, as you correctly point out, there are some details I just can’t get into, but overall, we expect that this move will put us the full $25,000 cashout amount ahead, in terms of our overall net worth, and actually then some on top of it.)

      Thank you for your comment!

  4. What ever really works for you. However if you have job offers on the table for yourself and freelance contracts for your husband, it does seem an extreme thing to do flat line your pension pot. Especially as it’s been put into savings rather than immediately paying things down.

    1. It’s actually because we have offers that we feel comfortable doing that with my (modest) 401(k), if that makes sense – some things we’ve looked at include much better programs that we would be able to take advantage of, though we feel pretty strongly that we could actually do better on our own too!

  5. You can delete this comment too, if you like, but just wanted to let you know that I’m done with this blog if you’re not going to publish reasonable comments that disagree with your strategy.

    1. All comments from new commenters have to be manually approves. We don’t refresh this every minute during the day and as soon as we saw both your comments, they were approved.

      Two things, first I hope you don’t always assume the worst in people. Second, being “done with this blog” doesn’t get a reaction. If it helps you in a small or large way great, if not, no worries. There are hundreds of resources that may be better for personally.

      Best of luck!

      1. My apologies. I saw it awaiting moderation, which I can understand, however then it vanished completely, which I assumed meant it had been deleted. Clearly I was mistaken.

    1. Dominic, that’s a fair point. In my case, I believe I’ll have far more potential growth in the type of investment vehicles I’m considering in another five-ish years (when debt-free), that will far surpass the modest growth in the intervening five years in this plan, but you are right and that is exactly the type of concern I point out when I talk about age and time and plan mattering – if I did not have a plan to aggressively build a MUCH deeper savings for the future in a fairly short term, that would be a huge concern!

    2. I am 100% in agreement with you. It’s not a ~$10k loss, it’s potentially the loss of hundreds of thousands of dollars at maturity in 30-40 years. It may only look like you’re losing a little bit if you cash out this way, but unfortunately, the long-term growth would add up to WAY more than $10k. I’m disappointed that that aspect wasn’t covered in this post.

  6. Hey Joan, I am really glad that you stress that this is your plan, logic and path and that it runs counter to the advice of the financial gurus out there.

    I have a lot of issues with the logic you laid out but the one I’ll focus on is the fact that you appear to need the distribution to cover your 3rd and 4th qtr estimated taxes. That’s a big red flag for me. (I understand you overpaid in Qs 1 & 2.)

    I’ve been self-employed this year for the first time in my life. I carve out 50% of my “income” as follows: 40% to cover estimated taxes and 10% goes into savings to invest for retirement. I do the carve out at the time I deposit the check and the funds for taxes and savings are held at different financial institutions. I realize that the 40% figure may be high, but I’d rather be certain I’m covered and have some slush that I can move into the retirement savings bucket at the end of the year. Then I’ll start over.

    To be fair, I am living on more than the 50% I allocate for living expenses. That’s because while I was working I saved enough to carry me for about a year without earned income. I had one contract job this year, which is now done, but that’s how I allocated the payments from that job.

    If I can’t generate enough income to make that math work after my allocated savings are exhausted, well, it’s back to a 9-5 for me. No robbing my retirement funds. Period.

    I really think taking that money out of your 401k was a bad choice. I’m voicing my opinion here not to make you feel bad but instead to try to persuade anyone tempted to do the same to think twice.

    As always, Joan, I value your honesty and transparency and hope my opinion doesn’t put a damper on your style or day.


    1. Hey Ree! I mentioned this in another comment above but I want to make sure I’m replying directly too! I so much appreciate all your support and kind words.

      The big thing with the tax bill is that we DID NOT need the distribution to cover it. We had been paying (and were continuing to set money aside) from a category in our already-in-the-black monthly budget. So, we could have kept doing that without the 401(k) cashout and fully paid everything we needed for the taxes. The same was true for my tae kwon do payment.

      However, we essentially made the decision to “prepay” those budget categories to free up money month-to-month in this transition period. That’s not for everyone – and it ONLY works because we operate on a very specifically laid out budget that assigns each dollar to a category. I would actually NOT recommend that to most people we talk to, who either don’t have a current budget, or their budget is very broad and not expense-by-expense.

      I’m sorry I didn’t get into that more – that’s a great point and one I should have given more clarity on!

  7. I just did this for a much smaller amount around $14K before taxes. The main motivation was to pay off a credit card with a low interest rate and then do a balance transfer from a high interest rate. The $1000 penalty fee savings wasn’t worth the credit card debt for another year and frees up the payment for the next year. The added income didn’t bump me into the next tax bracket so it was like making more money. It’s not something I would recommend unless you have a high amount of debt or under any normal circumstance. But when a perfect storm of expenses and income loss (government shutdown w/no backpay) and bad timing for stuff happens, being smart with a sudden influx of cash can help tremendously.
    I still have a years salary in an IRA so I still have retirement funds growing at a nice high rate.
    But I do cry when I look at some of the stock opportunities I missed because I cashed out $10k…

    1. BM, that’s the key – being smart with it. I FULLY agree it isn’t for everyone, and it’s not without its drawbacks. But as with your situation, freeing up some money in the next year to two years was key for us, and we believe will put us much farther ahead on our long-term plans than we would be otherwise!

      Good for you for figuring out a way to make the best of your situation, and thank you for sharing your story!

  8. It’s clearly a matter of personal choice and really thinking it through. I’d personally NOT use this money to pay off debt, especially with the money I’d lose. But I’d probably have the motivation to pay off debt step by step and not need this money.

    1. Dojo, that’s an interesting point. In our case, we’ve been doing the step-by-step for three years and have, EVEN with this move, another 2+ years ahead of us, which we’d still be doing (albeit for longer) without this cashout. I feel like it actually would have been an easier decision for me if I didn’t have the plan in place to do it without – does that make sense? Instead, it’s not an either/or thing, it’s a “more oomph” one!

  9. Thanks for your transparency here. I just have to point out that anyone doing this for short-term progress is very likely robbing themselves of thousands of dollars long-term (never mind what’s lost to taxes and penalties) in compounding interest and that they will have to save much much more when they’re older (a post I like on this: Maybe there are cases where cashing out your 401k for debt repayment – although in this case it seems that only about a third of your original balance might go to paying off debt – is the right thing to do, and I sincerely hope that this is the right path for you, but I still can’t help feeling uncomfortable that you’ve portrayed emptying out your retirement savings vs not emptying out your retirement savings as potentially equally good choices. They’re really almost always not.

    1. Colleen, I would definitely agree with that as a mathematical factor – and while that’s not the primary factor for me, I’m not disagreeing with its importance as something to weigh! In our case, the compound interest on our credit cards was certainly a much bigger problem in the other direction, but at the same time – that’s a HUGE part of why we have such an aggressive plan to pay off all debt and save heavily – because we want to build wealth with the same speed and agressiveness we’ve tackled debt!

      1. Thanks for your response, I really admire what you’re doing here. And sorry if my comment came off as judgmental – I just really wouldn’t want someone to make a move like this without understanding how much more aggressively they’ll have to save in the future to make up that lost ground. Sounds like you’ve considered that, though.

        And I agree on prioritizing the interest on debt. I have $17,000 in credit card debt that I’m tackling, and so my contribution to my 401k is low for now so that I can throw the bulk of my efforts at the debt. But for me, the growth of that small savings has been maybe my biggest motivation to get rid of debt once and for all so that I can start making up for what feels like ages of lost time (I’m also 30) and put all that money I’ve learned how not to spend to work buying my freedom!

  10. This post does seem to be raising the heckles from a lot of people, ultimately it was Joan’s 401k to cash in, if she wants to spend it on her hobby and put the rest into savings it’s up to her. I may not agree with what she’s done, but she’s explained a little around why she’s doing it. As her husband has quit his job and is going freelance and Joan has a few irons in the fire for returning to full time work. If nothing is contracted or formally agreed her family needs to live, eat and at least service the large debt she has. So for the piece of mind it gives her she’s doing the right thing for her. She’s not yet 30 so has 30 working years to pay back into a new one, so it’s not as though she’s raided her daughter college fund and leaving her post high school education stuffed up. She’s taken a decision, and shared it. So the criticism she seems to getting seems a little unfair. She could have done it and not told..

    I don’t agree with what action she’s taken, however that’s because I’m not dealing with her personal circumstances and only seeing it as an onlooker. So thank you Joan for sharing your story and sharing your reasons.


    1. Jonathan, you never fail to make me smile. The funny thing is I haven’t yet found a comment that really “hurt” (THAT’S NOT AN INVITATION, FOLKS!) But I appreciate your support for me sharing my story – that means a ton!

  11. Joan,
    I haven’t read any other comments regarding your 401K cash out. I didn’t want to get side tracked from my line of thought here. So please forgive me if someone else has ask this and you have answered.
    My question is: You cut back on “jobs” to home school your daughter and spend more time with family. Saying that, what’s changed your priorities?
    You talked of a 2 hr commute to a new job opportunity. You also talked of moving closer to said job. Are you considering that for your family? You talked of November being your “work out the job opportunities/home location” month. I think from reading your newsletter today, all of these questions are being considered.

    You being 30 and me being 50 is a part of the thought process here. I hear what you are telling us and what you have decided with your family and your accountant. Right now cashing out your 401k was worked out with the accountant. You sound like you have a plan for savings for your “retirement.” From the pass two years of newsletters, you are following thru with your plan to become debt-free and live that way. I am “concerned”. That’s all, just concerned. Being 30, you have more years to save than I do at this moment. I agree that just because you turn a certain age, doesn’t mean you retire from the work force. If you plan accordingly, youwill have no debt and money to pay utilities, taxes and home insurance PLUS lots of fun money to travel or whatever your interest is.

    I wish you the best of planning for your future!

    1. Cay, that’s part of what I didn’t get into here (the family piece) and that’s a VERY good question. Overall, I guess the shortest answer is that our new move will give Sarah a combined higher number of waking parental hours than she currently has, and that, in turn, was a higher number than before I left my full-time job.

      Much like the 401(k) decision, that makes it sound like a mathematical equation, which it decidedly isn’t. But it DEFINITELY is one that’s our top consideration. Having a dad that she literally didn’t see for 4+ days in a row because of work and sleep schedules was really one of the biggest factors leading us to this point, and everything else had to flow from that 🙂

      You are always a blessing. And I can’t wait to keep sharing our journeys!

      1. Joan,
        The personal part of this plan is where I was coming from! Glad you got that. I was so excited for you and your choice to home school and spend lots of quality time with family.
        I will pray for you and your family as your map out your life plans. I knew you had the financial part down pat, esp based on your past newsletters!!!

  12. It is not true that you can’t touch your 401 until you are 591/2 without a penalty. How is it now one knows about 72T? I worked a very phisically demanding job for Verizon(the evil empire) for 34 years. I started when I was 21. There was no way I was working for them for 40 years. Between 401 and overtime savings, I had plenty of money when I was 55. All you have to do is take out the same amount yearly for 5 years or until you are 591/2. If you take out less than your account is making, even early withdrawal will not cause you to run out of money. There are a few rules, but they are simple. Very few people at Verzion work until they are 591/2, and this is how we do it. Google 72T and check it out; maybe it will work for you.

    1. Donna, that’s a great point and one I would highly recommend talking to a local financial professional (i.e. accountant) about. We had actually had that come up in our conversations and while it wasn’t an option in my circumstance, it’s a good one to be aware of!

  13. I think my only main concern is the comment where you say taxes you will pay anyway.
    Reaspons for this is sure you will have to pay taxes eventually but untill then you have the full benefits of taxfree money reproducing in some funds / interest accounts earning you more then normally you would normally.

    But i do agree i rather have my money accessable then having them locked up somewhere. I think here in sweden its even harder to get access to the money. We do have some helps like we can do tax deduction for up to 1600$ a year or somthing ( not exactlly checcked the curreny exchange ) But it would end up in an account i dont have control over. So i am doing my investments my self.

    Swedish dude with about 109831.40 US Dollar in debt ( student loan, mortage, motorbike, creditcard(1200$ as we dont have the same creditcard culture over here event tough its comming) )

    anyway wish you good luck on yoru debt journey and thank you for an inspering blog.

    1. Yuck! I just have to laugh only because I was joking today that I was going to move to Sweden for the healthcare 🙂 (Friend of mine in high school was an exchange student from there!)

      I am definitely of the do-it-yourself mindset and I applaud you for investigating the options you have and choosing the best one for you! I knew today’s post was going to be kind of U.S.-centric and I DEFINITELY appreciate having a broader perspective!

  14. Joan,
    As a reader of your vaulable website and tax professional I will only comment on your comments on the scarficing for only the 10% penalty.
    The other part of your decision is personal and I believe that folks need to do what they feel makes the best sense for them, but only after they get financial advice on the consequences of what they are about to do.
    If you would have come to me…I would have told you, you are just focusing on the 10% penalty as the downside. The reality is that if you take a chunk of money it will also increase your ordinary tax rate. Most instituions will withhold federal tax, but not state tax. What I see in my practice is that most people are surprised by this. When they complete their tax return they ususally will end up owing to the state. Just because you have money withheld from the disbursement does not mean you are ok…it means you have now given the IRS and state taxing authorities more money from you than you needed to. so yes, it may be true you may have saved in interest on your debt, but you instead gave it to the IRS/State instead of the banks. So not a real savings, not to mention the fact that you are losing on the earnings of that money for retirement.

    1. That is a good point – since we are working with an accountant and paying estimates for federal, state and local already, we had that part covered, but you are VERY right that the standard forms to cash out do not really address that! Thank you so much for the reminder!

  15. Also consider that the withdrawal may end up bumping you into a higher tax bracket costing you a lot more in income taxes. Something else to factor into the decision.

  16. I hear what everyone is saying about you losing all the potential gains on your retirement account, but let me add another possibility here that you were as likely to face. You could just as easily have had LOSSES on your retirement account. I have a friend who saw her 401(k) take a *huge* hit in the 2008 downturn. These accounts are keyed into Wall Street, people… and if Wall Street dives, you dive. Period. No escaping it.

    So it’s just as well you took it out now, given that we are still in danger of going into default early next year if we get shenanigans in Washington again like we just got over with in the past month.

    I’m not saying “never use a 401(k) because Wall Street,” but I do think it is as much a mistake to put all one’s eggs in a 401(k) basket as it is to rely wholly on Social Security or any other *one* source of retirement income.

    So let’s not pretend the golden goose is being slaughtered here, because that’s not the case at all. And believe you me, it’s better to go into retirement with just a little money saved aside and no debt than it is to go in with a healthy retirement fund but still saddled with all the old credit cards.

    1. Dana, that is a huge point. (And, let me just say, I’m one of those people with some losses in my past!) Some big gains at points too, but the bottom line either way is that, as I said in my earlier post, I’m a pretty big control freak – and that means that no matter how I choose to invest in the future, I’m going to do so in a mix of ways that keep ME primarily in control of my money. 🙂

      Thanks so much for sharing that perspective – you’re right that in light of the past month especially, it’s VERY relevant!!

    2. Anyone who had a well-balanced 401k portfolio certainly took a beating in 2008 – only to have all of that money returned (and then some) if they took the following steps:
      (1) do nothing
      (2) keep contributing

      posts like this are incredibly short-sighted…..

      1. Did nothing (except manually rebalance) – lost more each year between 2009 and 2012 than I did in 2008. VERY MUCH depends on your company’s fund options, though your point about rebounds is worth considering, Joe!

        1. Joan:

          I’m fine with people that make choices to cash in 401k’s if there is a real need to do so – whether I agree with those reasons or not. I’m also fine if some choose to not invest in the market at all, and invest in other ways (real estate, side business, etc…). But since this is a personal finance blog at it’s core, let’s at least try to educate people a little.

          With all due respect, I find your claim that you lost more money in your 401k between 2009 and 2012 than during 2008 hard to believe. The overall Dow Jones Industrial return between 3/20/2009 (approx. low point of recession) and yesterday is something like 115%. I you had ANY sort of investment options that were diversified over that time, it would have been virtually impossible to not make a great return. The S&P 500 returned about 140% during the same time.

          Of course, if you had individual stocks, or gulp, stock of your company, then you have other issues and probably could use some very basic tutoring in asset allocation. I’d be interested in seeing what stocks or funds you are claiming to have lost more money over the past three years than you did during 2008……I’m sure others would be as well.

          If you actually lost significant money during that time, it would make for a fascinating post on this website of what not to do. I know you have mentioned you want to be very transparent regarding this site. Let’s see the specifics…..

  17. Hi Joan,

    This is such a well-thought-out decision, and it’s so great that you have a tax professional guiding you. (I need one of those!)

    I like your stipulation that you shouldn’t cash out a 401(k) for frivolous reasons (like a vacation), and I do understand the importance of your tae kwon do from previous posts (plus your explanation in your comment–it’s a non-negotiable expense that you’re paying for anyway).

    Plus, I’ve often read advice about cashing out in your 20s or 30s isn’t that big of a deal, all things considered. When you’re older, yeah–but even so, individual circumstances have to be considered. Doing it with a commitment to being debt free is also sound advice.

    I also like your plan to buy a new car with cash–I did exactly that back in 2006. I was on the brink of divorce (or just after, I forget), and I cashed in some investments that were exactly enough to get a good vehicle that would last me years. My old one didn’t have as many miles as yours, but it was already 10 years old, and around here you need a car (Philly suburbs–not like where you live, but walking anywhere isn’t usually possible, and public transportation doesn’t cut it). There’s nothing worse than unexpected car repairs to set you behind and stress you out. I needed that security of no car worries as I set out on my new life (so to speak), and I’m glad I did it.

    Also about relocation: that’s exactly what I’m doing. I, too, bought a house during the bubble! I’m HUGELY upside down through no fault of my own (I had a loan with 20% down though in retrospect I could have bargained harder–the house has issues and they needed to sell), but now it’s been hard for me to sell. No profit; if I’m lucky I’ll get approved for a short sale and won’t have to pay the difference–hopefully (looks good so far). But I’m moving to Portland–I’m so tired of driving everywhere. And I’m renting–home ownership is way overvalued as far as I’m concerned. I love my gardens and everything but all the work a house needs has detracted from my “real” work for a long time

    Good luck! I need to follow your example of thinking out decisions like this–thanks.

    1. Leah, THANK YOU so much for your kind words and mostly for sharing your story! We definitely put a lot of thought into things – and in particular I have to applaud your decision about your car. I don’t know how much my car is “worth” in cash, or a new one, but I know that not being stressed about it all the time is worth a HUGE amount of peace of mind. Especially during any period of transition!

      I’m excited to hear about your move – and I hope you can get through the short sale and settled into a nice place that someone else maintains in Portland 😉

      1. Here you go: You probably know about this but thought I’d mention. 🙂

        The other thing about buying with cash is all the interest on a loan–I’ll let you do the math for that one. Plus the time/energy to make payments. Also, buying new (as I prefer) means if you take super good care of the car, it will last a good long time with hardly a worry.

        I’m excited about the move too–long drive! Thanks. 🙂

  18. Joan:
    I believe you are doing this with best intentions and I’m sure you feel it’s the right decision in your particular situation. However, I do think you have made an extremely poor decision and if there is ANY possibility of undoing this action, it is in your best interest:
    (1) It is pretty short-sighted to argue that you are only forfeiting the 10% penalty. You are forfeiting much, much more. Even if you are able to replace the 34k with increased savings through new opportunities, that new savings will be taxed first, while the 34k was in a tax-deferred status. Sure, you’ll eventually pay income taxes on it…..but much, much later after it’s had lots of time to grow. If you still believe in the underlying power and concept of the 401k, and plan to start investing in another one, then why cash out of the first one???? I can tell you by the time you replace 34k in savings, the 34k you just forfeited would be A LOT more.
    (2) I’m not sure how depleting your 401k is putting you in position to earn more money. It seems everything you’ve identified could have been accomplished without touching the 401k. You mentioned that you didn’t have to cash in to pay for your tae kwon do and tax payments…..then, um, why do it? Need a car? buy a beater for $1,000. I can only think of a few possible reasons one would cash out a 401k… catastrophe such as a health issue, etc….I’m sorry, but none of your reasoning seems logical.
    (3) Quick story – It took me 10 years to get my 401k balance over 50k, then only about 5 more to hit 150k, then less than 4 to hit 300k……sure, I’m putting in a lot more now than I was when I started but I think you see the point – I’m still contributing but the gain/loss of my 401k is now driven more by the market performance than by my contributions. And sure, there have been hiccups (i.e. negative 43% return in 2008). However, they have been more than off-set by the following returns (2009 +42%, 2010 +18%, 2011 -6%, 2012 +17%, 2013 so far +24%). Mid 40-something me would do ANYTHING to make sure 20-something me didn’t cash out the 401k for ANY reason…..

    1. Definitely don’t plan to contribute to another 401(k), Joe! Sorry if I gave that impression. And definitely not in need of a beater car – have one, need a second one that can take a lot of miles and allow our current beater to keep going for several more years!

  19. Joan,

    Thanks for the post. There are a couple of thoughts I would like to share. The most important thing that comes out in all of this, to me, is that these decisions are more about motivation and emotion than pure math. You aren’t running in the red month to month so gold star number 1. You have succeeded in living within your means. You have conquered roughly 40% of your debt, and considering the initial amount that is an incredible feat – gold star number 2 for you. I believe this move is not a strong financial choice in the short run, but could be fantastic for your long term progress. At this point, how you “feel” about your progress is the key. If cashing out your 401k improves how you feel, your outlook, your happiness, you are more likely to succeed in the next phase. I would not have recommended your choice, but totally understand that it doesn’t always have to make perfect math sense. Sometimes, the less logical choice is the better one, as it can lead to more happiness. I have had to cash out a 401k before (not all nor most of my 401k balances). The math wouldn’t allow me any other option. We, like many, had a job loss. That was over five years ago. Would I like that 18k to now be worth around 22k (market tanked right after I took the amount)? Sure, I would, but I share that to point out that there is no guarantee that your 401k balance would have gone up over the next two, three – five years. We are at a near record high for the stock market. It could be the same for you. (my 401k selfishly hope not). The point is we don’t know what is going to happen tomorrow, next month or next year(especially the stock market), but you do know what you can do to make you happy today. The worst thing you can do, is die rich in money and bankrupt in life, and I believe that is exactly why you are making the choice you outlined. At the end, we may be rich in both, but living a principled life that brings happiness and joy to you and your family is the better choice. You didn’t spell it out in those terms in the post. You focused on rationalization/reasoning, whereas I think it is about emotion/outlook/motivation and if we see leaps of progress in the next year, you will not need to justify or rationalize this choice. The proof will be in plain sight. Wishing you and your family the best!

    1. Matt, you rock! I feel like I focus so heavily on the motivation part in my regular financial updates that I wanted to get more into the numbers and other factors here, but I super-appreciate your support and kind words! I definitely am happy – and have increased my family’s happiness exponentially with this decision. 🙂

      Good for you for doing what was right for you at your time – and you’re right, it’s not that you don’t look at it and say, “Gosh, I wish it could have been like X instead.” But you make the best decision for the reality at the time, you keep moving forward, and… onward and upward!

      Thank you for sharing your story!

  20. A good, thorough, comprehensive post. Still, I have to say that it wouldn’t be my first choice.

    Yes the 10% nominal hit is the only “penalty,” and you’re right that the 25% tax hit isn’t really a penalty. But in retirement, I’ll be taking money out at so many different rates and in so many different ways that I’ll probably be able to withdraw pre-tax investments at a lower rate if not tax-free. Even if I can’t wait until retirement, maybe I’ll have a low-income tax year — perhaps due to job loss or taking time off for a baby — between now and retirement during which I can roll it into a Roth… or I’ll get to use it for some other penalty-free way like a house or education. Maybe I’d use 0% credit card balance transfers or even peer-to-peer lending to get away from high interest rates.

    That said, personal finance is personal and if this works for you, then I’m glad you did it and I’m sure you’re even gladder. I bet seeing that smaller balance feels pretty great 🙂

    Good luck to you and your family!

    1. Thanks! You’re right, there are other options and I don’t recommend a cashout “just to do it.”

      Though I’m anti-401(k) broadly speaking, for myself, I would not have cashed this one out if there weren’t other situations at work; I’d have done what I’d done for the past 8 years, rolled it over and let it sit and earn what it could with no contributions. (As I mentioned in an earlier post, we’d had no company match since early 2005.)

      But in the situation we were in, we definitely were in a better position tax-wise to do this for 2013 than in 2014 (due to what you mention – income changes). If I knew that 2014 was going to be a low-income year, I definitely would have done it right after the first of the year for sure!

  21. Maybe I’m missing something, but how do you reconcile “then, we put three big chunks of money into a particular savings “bucket” – one for the fourth-quarter estimates, one for the second half of my tae kwon do master’s program payment…”


    “again ALL of it, not just some – and put the same dollar amount for maybe 2 or 3 months into a savings account/emergency fund of some kind. ”

    It sounds like you’re using 401k to pay for a master’s program in tae-kwon do, which to me is a want, not a need.

    I lean very heavily towards the “don’t cash out your 401k” camp and don’t see how this was a great decision. Assuming you were contributing during the recession, you’ve given up extremely cheap shares that will likely be worth much more in 30+ years not to mention the dividends they’ll pay and reinvest until then.

    1. Ryan, I addressed that in some of the earlier comments, but to make sure I’ve noted it here too:

      With both the tax bill and the tae kwon do, the big thing is that we DID NOT need the distribution to cover it. We had been paying (and were continuing to set money aside) from a category in our already-in-the-black monthly budget. So, we could have kept doing that without the 401(k) cashout and fully paid everything we needed for the taxes. The same was true for my tae kwon do payment.

      However, we essentially made the decision to “prepay” those budget categories to free up money month-to-month in this transition period. That’s not for everyone – and it ONLY works because we operate on a very specifically laid out budget that assigns each dollar to a category, and because we’re taking that freed-up money and putting it toward debt. I would actually NOT recommend that to most people we talk to, who either don’t have a current budget, or their budget is very broad and not expense-by-expense.

      I apologize to anyone who read that twice, but I copied it and pasted it here from an earlier comment just to make sure I’m clearly addressing!

    1. Wait, I can’t tell if you’re kidding or not, Joanie!

      If we get a car, it’s to get a second car – not getting rid of this one – because we believe this one will last us MUCH longer and can be a huge asset to us.

      But it’s not safe to drive 2 hours daily. It’s not really safe to drive 2 hours a week 😉 But we’re doing it anyway!! 🙂

  22. I had cashed mine out a while back. I came to realize that ‘saving for retirement’ while taking loans to pay anything amounts to leverage. People say it is ‘safer’ or ‘more secure’ to have retirement savings, and in isolation that is true. However, when you are also taking loans, then that is leverage: taking additional risk for the hopes that the return from your 401k (or other investment) will outpace the interest from your loans.
    IMO: If you have a 401k and loans, then you are taking a high risk position, which your financial advisor will not be able to explain. Yes, there may be additional reasons (such as lack of discipline to save without a 401k, or a very generous employer contribution), but those are rare.

    1. Your “very generous employer contribution” statement was probably the funniest thing I read all day, Daniel! 😉

      Thanks for sharing your thoughts – DEFINITELY agreed that there is a trade-off in risk that you really have to weigh!

  23. First…I think you are very brave to tell your readers you cashed out of your 401(k). This is not an easy decision to make and not easy to broadcast!

    Second…I think we all tend to over analyze the decision. Our first response is “OMG…how could you do that?” However, people must understand what motivates you or others internally? If you have the opportunity to pay off a ton of debt to gain a sense of freedom then that is PRICELESS!!! How can you seriously put a price tag on your freedom?

    Lastly…GOOD FOR YOU. I love that you bucked the norm…did what you felt was right…and came closer to pursuing your dream!

    1. Ha, thanks, Travis!!! You’re right that it was scary to put it out there – but comments like yours are totally making it worthwhile! 🙂

  24. Joan,

    You made a sound decision based on the facts you have today and the assumptions you must make of the future. It would be foolish for anyone to 2nd guess your decision without being in your exact situation.

    What i am particularly impressed with is your foresight to keep the money aside until you have better facts and can make a sound decision in the future. People in the height of emotion or turbulence rarely make good decisions. When your waters calm a bit, I think you’ll be able to reflect clearly and move forward smoothly on a well constructed plan.


    1. Jason, thank you so much for saying so! We are certainly hoping to prove that out – and while it would be tempting to do a few things in particular right now, I’m convinced that holding out for just a little will have HUGE results.

  25. I have to side with the WTF camp here. You started with $55,000 in debt and $35000 in assets. Net worth -$20,000. You use the money from the 401K to pay for things already part of an in the black budget, and then at best use the balance to pay off some high interest debt (or at worst buy a car). If you go the full debt repayment route, this gives you $44,000 in debt, zero dollars in assets for new net worth of -$44,000. To access $25,600 you paid $3,450. Some quick arithmetic reveals that this is effectively an interest rate of about 13.5%. I understand that the goal here is deby reduction, but borrow to acquire a second car would have come with a lower interest rate than that and without the serious hit to the overall net worth.

    1. Colin, thanks for your comment! If we do attack the debt, the total will be much closer to $25,000+, paid in one big chunk of about $12,000 and then a handful of about three to four smaller chunks totaling the same amount over the coming year. All of that debt has an interest rate of 14.99% to 23.99%, and our net worth after approximately 3 months will be higher by about 8 to 9% at least. (I generally don’t show our net worth calculations, though I have in the past, in my monthly updates, but there are a number of factors at play and it’s been well in the black, amazingly, for more than a year, which is a huge accomplishment!!

      You’re definitely right that borrowing for a car would have a fairly low interest rate – car loans are definitely low! However, we’re committed to being debt-free for life – and we plan to not at any point borrow for a vehicle again, thankfully!

  26. Well, Joan, I have read both of your articles and read every comment, but am still not warming up to your position. Only the future will tell if you actually made a good decision.
    The most overlooked cost here is the magic of compound interest. By spending this money now and doing “something” later, you have made it exponentially more difficult to amass enough to actually retire in comfort. Yes, I completely agree that there are other ways of saving and accruing for retirement, there is no way to regain the years of compounding that you have just wiped out.
    I am 55 and FIRE. Perhaps that’s why my perspective is so competely different from yours. I am alarmed that more 20- to 30- somethings will consider this possibility, just because you did it.

  27. I am one of the people who took out a loan from my 457(b) plan to pay off my credit card debt. The interest rate is much lower than my credit cards and at the rate of my current pay situation, it was going to take years to pay off.

    It was probably not the best solution, but, like you, i felt like i had no choice.

    Thank you for such a detailed post on this.

    1. Thanks, OC. You’re right – it’s not anything someone would look at and say, “Oh, this is SUPER GREAT,” it’s more, “OK, this is going to help us get where we need to go and something has to change.”

      I’m glad you made a decision that worked for you!

  28. In 2009, my husband’s company went bankrupt, so he no longer earned the overtime pay that was often an additional 20% of his base salary. My freelance work also dried up, and our combined income went down by 35%. Despite cutting the budget a lot, we racked up $17,000 in credit card debt. To get back on track, we took $10,000 out of a college savings account and $3,500 out of my Roth-IRA (both had a 10% tax penalty). The credit card debt was gone in a few months. The college account has caught up to where it would have been had we not taken money out, and the Roth-IRA was re-filled the following year. Getting rid of the debt with such drastic measures made us face our spending reality and we have been far more careful since.

    1. CM, those are such tough situations – and you are so right, that feeling of really facing up to the reality changes you in a way nothing else does. That has really made a big difference for us, I know!

  29. Spectacular write up. Thanks for the transparency.

    Obviously this was a difficult decision, but it appears you feel at peace with the decision.

    My wife cashed out her 401K to pay off debt. We’ve been debt free for a while now and you can’t put a price on the feeling of being debt free. It cost us roughly $2,500 for that feeling and it was worth every penny.

  30. I think you could have titled the post, “How I justify spending 34K of retirement on a used car”. I think this was a shortsighted decision Joan. Most people have covered the many downsides of your decision so I won’t reiterate them all. I will just focus on a few. I get not wanting to drive a beater car with children and a long commute, I wouldn’t either. But you are cutting off your nose to spite your face to cash in your retirement instead of getting a comparatively cheap car loan.Yes the goal is to be debt free but it seems like you are spending a lot of extra money to get there. Secondly, I think if you needed some motivation (and who doesn’t in the midst of a long debt repayment plan?) you could have brainstormed with the community here and found numerous cheaper alternatives to stay motivated rather than cashing out your retirement. For one how about gaining some perspective on your situation by volunteering with those less fortunate in your community? How about taking the focus off debt repayment and explore some new hobbies or activities with your daughter?

    Lastly, why are your credit cards at these outrageous interest rates? Have you called all your creditors and asked for a lower rate? I can’t imagine that you can’t qualify for lower rates esp. if you have a solid repayment history. If lower rates on the existing cards aren’t possible what about another consolidation?

    Good luck (I do mean that sincerely) with your debt repayment and the job turmoil.

  31. I would never cash out a 401k to pay off debt. You’re not only paying the 10% penalty, but you’re losing tons of future interest by pulling the money out. Not small interest, but real interest, like 10-12% if invested in good growth mutual funds. 10% of 35k is 3500 a year last I checked. Also, based on this story, I would say that behavior has not changed enough. You’ve got 12 grand sitting in a low interest savings account with 55k in credit card debt because your car has 130,000 miles on it. Big deal, you should get at least 250,000 miles out of your car. Pay off the debt today, work a car payment into your budget, paying yourself. Buy a new car after you’ve saved enough cash to do so, and not a minute before.

    1. Steve, I apologize for the confusion about the car – we’re not buying “a new” car, and we’re not getting rid of our existing car. We only have the one and the coming job changes MIGHT (and it hasn’t been decided yet) require a second car, which would cost us something like $9,000. We are still treating our Taurus well and intend to drive it for many, many years to come; we simply can’t work in two different states and share it, though!

  32. It has been so refreshing to read an alternative point of view to the “keep you money in your 401(k) at all costs!” school of thought. Yours was a very well-thought-out move, and I appreciate being allowed to peek into your process. My husband and I are seriously considering cashing out one of our retirement accounts to “retire” our credit card debt–still a “retirement” plan, eh? 🙂 We are spending nearly $350 per month on credit card interest; the penalty would be made up within 12 months. Thank you for presenting a reasonable “other side of the story” for us to consider!

  33. Tens of thousands lost due to lost compounded returns and penalties…yet this this is rationalized by a short-term cash flow? I really hope Americans use your blog as a what NOT to do otherwise our country will have no one who can afford retirement.

    1. with the way this country is going… I bet most Americans (myself included) feel there’s no such thing as retirement anymore, I have accepted the fact that im probably going to die at work

  34. I would like an opinion. In the process of building a home. Total cost of home, $550k. Have $140k to put down from equity in current home and other funds. Leaves me with a $410k mortgage. $1.4mil in 401k. $720+ available for withdrawal. Weighing 2 options – mortgage for 30 years without taking any withdrawal funds, or cut mortgage to $200k and finance for 15 years. That means taking around $300k in withdrawal and will cost me about $70k in taxes and penalties. I have run the numbers, and know what the better “math solution” appears to be. But peace of mind of paying life of shorter payoff time is quite attractive – plus, my monthly house payment will be about $600 less a month. Would like to have house paid for by retirement (in probably about 15 years). What would you do?

    1. Such a big withdrawal would be on a high tax bracket. is it possible to make smaller withdrawals over a few years and pay off the principal faster? would that improve the “math solution”?
      Have you considered taking the withdrawal at retirement? That should save you a lot in taxes. In other words: instead of making a big payment now for the 15 years of payments, have you considered getting a 30 year loan and just pay off the principal after 15 years? It is a bit riskier, but with your sizable 401k (and possibly other savings you have) you should have the ability to navigate through any difficulty that may arise.
      I personally like the idea of a shorter payoff time, but if I was in your shoes (assuming you have other fairly liquid assets) I would just pay off the house the year i retire. again,t hat is a personal choice – in the end when you look at the “math” and weigh the risk (handling the unexpected) and your peace of mind that is when you decide what you are comfortable with.

  35. Also looking for anyone’s input on something i’ve got going.

    I recently left a job where I had $50k in a 401k. Im 30 years old and transitioned to a MUCH higher paying job (with a 401K that im contributing 10% to). Im thinking of selling my current house (have about $40K in equity) and purchase another that affords my family (and dog) more space. My thought is, do I cash out the 401K so that I have a new chunk (probably around $30k after taxes and penalties) for a downpayment and keep my existing property as a rental? Or is the better thing to do sell my current place and use equity for my downpayment and transition the previous 401K money over to my new 401k and keep on moving. To me, it seems like having an extra $200K appreciating asset for the next 10 years will equal out to whatever gains the 401K could net. But, I could be way off and need advice.


  36. Brendan, Congratulations on your new job! Always exciting to make more money! Not so exciting to spend it as soon as you know you’re going to be making it though. I would advise changing your thinking about your 401k funds. They are for RETIREMENT, not a bigger house 🙂 True, having a $200K investment property MAY be a good thing. But, consider this….have you ever been a landlord? Do you know the “hassle factor” involved with rental property? What if you cash in your 401K to keep your existing house for a rental, then tenants don’t pay and trash your beloved home? How would that make you feel? Not trying to be negative, just realistic. I have 2 rental properties. There’s a lot of work/hassle involved. sometimes I just wish my money was sitting somewhere, earning interest tax deferred (like your’s currently is)! Also, it sounds like your a bit giddy about a bigger place (your dog doesn’t care, really) Let it settle, think about it, do you really want/need a bigger place to fill up with S-T-U-F-F? And up your 401K contribution to 15% ! ‘Nuff said I guess…..good luck!

    1. Great points. And REALLY appreciate the quick response. Good stuff to think about. And you may be a bit rash in saying im a bit ‘giddy’, but more-so trying to weigh my options and trying to decide if an investment property is worth it.

      Thanks for the response..

  37. Brendan, I am not a financial adviser, but a few things to consider:
    1-Anytime you borrow money on one side to invest in another, you are leveraging, which is a high-risk position. Yes, you get a better expected return, but you become inflexible if any surprises arise. I do not think such a high-risk position is advisable for someone with a family.
    2-You just got a new job, don’t commit yourself too early. I sure hope all goes well for you, but given this additional risk factor it may not be the best time to take other investments (especially one as inflexible as a house)
    3-Have you considered other investments? Why is a second house any better than the stock market? The stock market is also more liquid and you are not committed to a payment. Have you checked the law on owning a second home? In many states you lose protections (no longer a home-owner, now you are an investor).

    1. Daniel – Thanks for the response.
      1- I suppose I should clarify, my family consists of me, my dog and live-in girlfriend. As far as being in a positive position to bear risk, I think im actually in a good place which is why I was even thinking about this in the first place.
      2 – Very good point and something i’ve considered as well. Appreciate that.
      3- Yes, and my reason for the house is because I bought this place in 2010 and literally rock bottom. Its a townhouse and I had a neighbor just sell at $50K over what I currently owe on the property – its appreciated about $30K in the past few years. So, I believe it to be at least a bit less risky than putting money in the market (Although, I wish I would have thrown it all at Tesla back in November when I was thinking about that…)
      Havent looked at any legalities, and by protections, what do you mean?

      Thanks for the response. Look forward to hearing back!!!

      1. Brendan,

        One last option to consider: getting a reliable dog-walker until you have other reasons to move (maybe you want kids in a few years, maybe take time to test the waters at the new job, maybe you will move to a different state, maybe your girlfriend has a big career change, etc, etc).
        In the end it depends on your choice of risk level, which is personal.

        On legalities. If you foreclose on your primary residence, you can usually walk away even if you have other assets. In many states you cannot do that for a second home: if the lender did not get their money back form the foreclosure they may be able to go after your other assets. This varies by state (I am assuming you are in the US) and may change.

        To your original question:
        Investing in a house is less liquid, but you can use the money before retirement. the house is, in a way, less risky but also has a lower average return (watch out for anecdotes – exceptional cases do not reflect your average return).
        If you are willing to take more risk, then I would consider the 401k or other investments with a higher return. Yes, your house appreciated well, but that is a poor predictor for future returns (some exceptions may apply, but are rare).
        If you want to invest on something you can use before retirement, then you should consider a house. Beware that it takes a while for you to realize your investment on a house and that it is not that liquid. Also, as Steve mentioned, many people have had unpleasant experiences being tied down as landlords – do your research.

        From what I know of your case, I would hold back for a few months. Then, if your situation remains stable and you are still willing to take extra risk, I would think it best to keep your 401k where it is and just sell your townhouse to use your equity on the new home. Just an opinion. Good luck.

  38. Hi Joan!
    I recently took a good chunk of money out of my 401(k) from a former job and put it toward my credit card debt. It was not an easy decision, but now that it’s done I only wish I had done it sooner! The psychological benefit has been unbelievable! I have never in my life been this determined to live below my means, pay off my debt and work toward my goal of taking a sabbatical from work to spend time with my son. I’m enjoying your posts and look forward to reading more!


  39. i resign from my job want to start a small business with the four o one cash out i am 58 yrs old i need a lump sum to get started

    1. Regina. You are 58, it’s unlikely you are going to be able to return the money in the pension plan. Don’t do it! Most business’s fail in the first 3 years, and do you really want to risk nearly 40 years of pension payments. Especially at the Autumn of your life.

    2. Robert Chinnis

      If you are 58 years old it would seem wrong to me to take the 10% penalty. You only have to wait another year and half to avoid that loss. You’ve waited this long to start:a business, what’s another 18 months?

  40. Robert Chinnis

    Hi Joan,
    I’m 50 years old and may be in a job crisis in the next year. I could see my yearly salary change from $55k a year to about $22k. My only debt is my home which is about $57k. I have $104k in my 401. A cash out would allow me to pay off my home in full. I only have a home equity loan which is variable but has remained at 4%. Paying off the house would allow me to keep my same lifestyle on a lower salary. In my view the 10% loss would not truly be any different than the amount of interest I would pay over the next 10 years anyway. Friends tell me I’m wrong and it wouldn’t be smart. Am I far off the mark?

  41. If the 401K was from a plan in which the employer was matching more than 10%, then it seems like you’d come out ahead even with the penalty. i.e. better to have put it into the 401K and cashed out then to not have put it into the 401k at all.

  42. I am currently working at the job i have my 401k at. I was going to remove 50,000 from it to purchase a house. If I dont use the full amount to buy a house what would happen?

  43. So maybe I’m just not getting it, but total after u would pay off taxes and with old for them how much did u end up actually having . not counting the take kwon do expenditure and such?

  44. I’m curious as to how this worked out for you 6 months later, Joan.

    I’m currently considering paying down our $75000 worth of CC debt by using a portion of my $375,000 401k balance by doing the following:
    1.) taking a maximum loan of $47500 & paying off highest interest cards
    2.) cashing out a total of $33,000 to pay off the rest of the cards, the taxes (25% bracket) & the 10% penalty.
    This would free up over $700/month to throw into savings & other investments, and in 6 months I’ll have more in my savings account than ever before.
    I’ll have no debt except for my mortgage (not underwater), will still have a significant 401k balance, and will be repaying the $47500 to myself over the next 3 years.
    By having no CC debt remaining, and having positive cash flow for our budget for the first time in 20 years, our peace of mind is worth the tax penalty and a short-term hit to my 401k.

  45. I stopped reading after tae kuan do master payment. You shouldnt give advice because goals are based off hopes and dreams as opposed to reality. And I’m sure I mispelled the martial art in question.

  46. hi, I’m thinking of doing the same thing when, I currently have about $8,100 in debt my 401k account has $11,098 in it, I stopped making contributions to it because I need every cent I can get out of my check, the cost of living is horrible anymore…. I got a new full time job but still work a few hours at my old job with the 401k account….im stressing out really badly over the monthly payments and im lookin to re-establish myself financially and stay debt free for the rest of my life i figure im only 26 got plenty of time to stockpile of cash before I retire, IF I retire with the way this country is going… can you give me a little input?

  47. Hi.Need help. Was laid off. Have a small 401k. Took small loan over year ago. Need to pay back because I don’t work for company any longer but the only money available to cover is in same 401k. Any ideas how I might go about this properly? Thank you.

    1. Lane – was the loan a 401k loan? If so, that’s a tough spot. I learned that my father in law did the same thing and has been working a ton of overtime to pay it back (the company lays it’s employees off frequently). It will be immediately owed for sure and when it’s due come tax time, I’m sure the IRS will auto-withdraw it unless an arrangement can be made (payment plan). How much is the amount you have in the 401k and how much is owed on the loan?

  48. Hi Joan. I’m in nearly the exact situation as you and your husband were in. I have roughly $6k in CC debt and another $8,500 remaining in 1 car loan and another $17,900 in another car loan.

    I left a previous company 10 years ago and there was a stock-matching program separate from my normal 401k plan (although this was also technically a 401k, too). Over the years, the total account has now roughly $34k or so and has only inched up from my vested $26k – not a ton because it’s 100% vested in the company’s large cap stock.

    I’ve been paying these debts down of course but not as much over the past two years because my income has shrunk down by $50k/year or so. Given that the stock itself hasn’t moved up too much and because it’s not diversified into growth, small cap, equity, etc, type of investments, I’m thinking this may be a great move for me. If I calculate my immediate income, state and penalty, I believe I will end up with around $16k-$18k of it. If I paid my CC debt and the smaller loan, I free up over $800/month. Or, if I pay the higher car loan debt of $17,900 (which is a newer car and has a higher interest rate than the other car loan), I save $709/month.

    Thoughts on which route to take? Just in case you’re wondering, i own my own home and purchased it 5 years ago and have roughly $200k-215k in equity in my home and the home loan is through BofA (like you) and being that my credit score isn’t fantastic, I don’t believe getting a HELOC is going to help me other than POSSIBLY lowering my interest rates – I feel like I’d be trading one evil in for another/robbing Peter to pay Paul. I want the debt gone for sure. Just having a piece of mind I can start fresh (I have not charged my credit card in at least 2 years and have been paying it down) and do not believe in CCs unless of an emergency.

    Thanks in advance!


    1. Hi Ciscokid,

      We just took from my husbands 401k to pay down 25k in debt. If it were me, I’d pay down the CC and the smaller loan then kick a major portion of the 800 over to the new car loan. I realize the interest is higher but if you are in an accident or the car is stolen you could lose a lot of money. I say it’s better to free up 800 a month than 700 🙂 BUT you have to weight what is right for you. Plus paying off two things rather than one will help your overall credit. GOOD LUCK

  49. When you wrote “I’m 30. I have a one-year plan, a five-year plan and a ten-year plan to first tackle our consumer debt, then to fund any needed higher education expenses for my daughter, Sarah, who is 13, then to live mortgage-free (either in a paid-off home or via renting, depending on circumstances), then to begin fully funding a large-scale “retirement” account.”
    This concerns me that you would be want to fund college instead of your retirement? Are you still planning on putting money in your 401k while funding college or only funding college? I’m a fan of Dave ramsey and i think we should consider our future first for the sake of our kids so they don’t have to take care of us if we run out of retirement money.

  50. We just took a dispersement from my husbands 401k (he had transferred it in from another company so he was eligible for an in-service distribution). We will be getting just under 25k and we happen to have 24,500 in CC debt. I also have 52k in student loans that I wasn’t paying on (in deferment) in addition to mortgage and car payments, vacation payments, motorcycle payment. CLEARLY we were/are living beyond our means. I’m hoping with the CC fully paid off, EVERY cent going to debt that we will be able to increase our 401k deductions to 25-35% to off set the tax and penalties and start paying down my student loans. It might not be the right choice for everyone but our discover card with a 12,000.00 balance and 2 promotional rates was still charging 130.00 a month interest and our min payment was 241.00 it would take us 40 years to pay that off. We are not interested in bankruptcy or selling off all our stuff. We just needed this as a leg up to start at zero. I hope that we can make it work, our credit cards are sitting in the freezer in a mug filled with water. I really hope that this is our “easy” way to being debt free. I will worry about paying back our retirement but not nearly as much as paying back 25k and student loans and still being able to LIVE.

    Thank you for writing this, it was nice to know that I wasn’t alone.

  51. I find it very interesting how many people say… “never cash out.” In some scenarios, this is the equivalent of saying to a drowning sailor, “wait, don’t pull the cord on your inflation device now, you may need it later!” This is complete BS because the fact is… NOW may be your LATER! Most naysayers to the cashing out the 401k option don’t get this, but they will if they become the drowning sailor one day.

    Life is ever changing, and the reality remains that sometimes people need a lifeline sooner rather than later, or there might not be a later.

    I, for one, am glad to see your alternative decision.

  52. I have a 401k that was funded entirely by my previous employer with no contributions from myself at all. At one point it was worth $50,000, but then my company was acquired by an investment company and that 401k account lost $31,000 in value after 10 years it has gained to $16,000. I am going to cash out this 401k account to pay down some medical debt that will allow me to purchase a new home. I’m getting the home with “0” down at 3.75% fixed. No brainer here I’m losing 4800 in penalties and tax (which I will get back) to enter into a long term investment in a decent community with a house that should be easy to flip should I have to move again soon.

  53. I understand all the ramifications and money lost (tax and future interest) on cashing out your 401k for debt. I understand it all except for House Debt. I pay off my CC each month and will pay off my car next year. Right now, I’m paying down my house early with extra payments However, I’m seriously considering to cash out my old company’s 401k investments for which I’m vested to pay off my house. I would then take that “old” house payment and put in an IRA; while continuing with my current employer’s 401K.

    There’s a lot of peace in being debt free and if the economy crashes -I own a shelter: completely. I know I will lose some future interest, but I also have other retirement (military pension) etc that will help me. Thoughts?

  54. I am 55 years old, have $107,000 in a 401K, my husband, 58, has $85,000. I’m thinking of cashing mine in to pay off our mortgage, car, credit card and medical bills, putting any balance into saving. We would be debt free and this would allow me to quit work, my husband carries health insurance for us at his job. His pay would easily pay our monthly bills then. What do you think?

  55. From what I’ve been able to discern, other than paying out a small fortune in taxes/penalties and losing the gains over time if left alone, most opponents don’t believe in the personal intent/conviction to change spending habits and/or do what’s right once the choice has been made to cash out. Unfortunately, most people are creatures of habit and tend to revert back to their normal spending behavior sooner than later.
    You know yourself better than any, so if this is an option you’re considering, at least be honest and don’t lie to yourself!

    Joan, I commend you for setting yourself free, and wish I had the same courage!

  56. Rebecca Crossman

    I am considering cashing out an old 401k to pay off 2nd mortgage so I can sell my house without losing any money. My question is how did you only pay 15% income tax? I currently fall into the 25% bracket so saving 10% would be great! thank you!

  57. Christina Smith

    I have read MOST of the comments about cashing out 401k to pay off debt. I didnt see anyone having to make my diction. Im a COAL MINER and my job might not be around much longer. Do i cash out and pay off debt as much as i can so i can stay in my house and live in my home town, or do i take the chance my job will be around for another ten years?

  58. I personally don’t feel comfortable “cashing-out” or selling some of the “shares” of a 401k, especially when I still work for the company in question, however, I was wondering…How do those of you who have ongoing health issues deal with the expense of such issues, such as co-pays and making sure that they get covered? For example, I have a bill from last year that is a little over $4,000.00 from when I was in the hospital that wasn’t apparently covered by insurance and I have a collection agency calling about it. Of course, I am also on medication is has some expensive co-pays, but most of that is covered through co-pay assistance…I guess my question: Is there a type of account that a person can invest their money in that earns a decent return and they still have the ability to “spend” it or “use” it as needed? Korey

  59. The 10% penalty being the only difference is not necessarily true. Generally speaking when people retire they make less income. So retirees fall into a lower tax bracket and 401k funds withdrawn are taxed at a lower rate. When people are working generally their income is higher so they are taxed at a higher tax bracket. If a person who is working withdraws his entire 401k balance he surely will be subjected to a higher tax rate than a retiree. Unless a person’s pre-retirement and retirement incomes are identical, it is a fallacy to say the only difference is a 10% penalty.

  60. Cashing out the 401k is never a good long term strategy from a logical stand point.

    It’s emotional change.

    For me and my wife we have always had some level of debt since our early 20’s. We thought this was normal. We always paid on time paying the minimum and then throwing what what we had left at it. As the years passed we went from one balance transfer to another with varying levels of debt from a low of a couple grand to 32 grand.

    We came up with two plans on how to attack the debt. Where it would take around 2 1/2 years to pay it of normally or hit the nuclear option with the 401k.

    We had done this before.. It works for awhile but then we hit a few setbacks and the debt balloons back up.

    We hit the nuclear option. We cashed out the 401k worth around 30k. We put the taxes in an savings account. That left us with around 20k or so.

    The next phase was putting a plan in place to attack the debt. We spent the next 9 months knocking out the rest.

    That was Sept 2015. I made some adjustments to our financial plan after the debt was paid off. Emergency fund is up to 6k. We are contributing to our 401k again and putting more money towards our mortgage principal after a refinance was complete.

    We felt we needed to make a drastic decision to become debt free and stay debt free.

    This isn’t something to be taken lightly. If you can’t drastically and permanently change the way you spend money you should not do this!

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