Tuesday, August 10, 2010

Would you dip into your 401k to be debt free?

Remember my friend J?  I have blogged about her Wanting to be Mrs. Jones, and complaining about debt.

Her husband is an accountant.  And he wants to take a withdrawal from his 401k to pay off debt.  Not a loan.  An actual withdrawal, with penalties and all.  The idea is that he wants to be free and clear.  He is in his mid 30's, so he figures he has time to make it back.  But feels that they aren't making any headway, so this way all the debt is gone.  And then they will live on cash.

First off....I know them too well.  They won't be able to live on cash.  They will run through money like water through a sieve, and when it runs out, they will run to their CC.  Guarantee it.

Second...I know they stopped their 401k contributions a while ago to increase cash flow.  So not only would he be draining the account, but hasn't been adding to it in a bit.

Third....they think this is a solution to the problem.  They have yet to discover that that problem isn't debt...it is poor spending habits, lack of budget, and an overall selfishness that they want it all.

Would you consider doing this?  Take your retirement, and pay it all off.....no loan.  Free and clear.


  1. We did...we are doing well on our debt snowball...but not happy that we dipped into the 401k. we should have just done the snowball from the beginning.

  2. They aren't snowballing. Let's say they owe $50k. They are planning on taking out $50k (plus fees) and just pay it off. No paying anything back. Just a bulk withdrawal.

    We have a retirement loan as well (see left). Ours was for a new roof and to paint the house.

  3. Sounds like they haven't even scraped the surface of the issue - the need for instant gratification! You nailed it - this won't fix the problem. Until that beast is tamed they'll be in BIG trouble!

    I wouldn't do it. I've never had much in 401k's and only used what was in a small one when I bought a house - coinciding with my rollover (but of course, I didn't have enough in the 401k to rollover, so they just sent me the cash out.) Thankfully, we put that toward closing costs on new home.... oh, but then we had to short sale that house... so it all was a big wash!

    Wouldn't do it again! Nope, never!

  4. Wow, no. To quote a local radio program, "Your Retirement is Sacred."

  5. I took out a 401K loan to clear out a debt (a stupid personal loan with stupid high interest), BUT I am doing a snowball plan as well. The timing to have the loan paid off will be about when I should be about 80% debt free. And I have vowed to NEVER touch it again!

  6. It sounds like this is like putting a bandaid on a broken leg....That leg needs to be re-set and casted

  7. I took out 6 loans from my 401k over the last 5 years. All but one to pay off credit cards that I charged up again. It took my awhile to figure out that I was messing up big time. When I finally did figure it out, I vowed never to take money from it again. I've paid off three of the loans and one will be done in October. That leaves the larges one until 12.2012! That sixth loan I took out under duress (paid in 11.2011) for a new roof. I tried to get a regular loan, but was turned down and I needed a new roof. The plaster is finally drying where the large leak was.

  8. @singledebt-it does take a change in thought, doesn't it?

    Again...my friends don't want a loan....they are going to just withdraw the money.