Ask the Coach: Should I Cash My 401k Early to Pay Off Debt?
Posted by Clint and Katy Davis on January 28, 2012 in Personal Finance
.................................................................................................................
Editor’s Note: As part of a special project on The PerkStreet Blog, we’re offering free question and answer columns on Saturdays with Customer Columnists Clint and Katy Davis of Davis Coaching. If you have a question you’d like to submit to get advice from these financial coaches, email it to editors@perkstreet.com.
Dear Clint and Katy,
I lost my job 2 months ago after 12 years of employment and I’m trying to figure out what to do with my 401k. I’m a 42 year-old single mom. I have $83,000 in student loan debt (BA and MBA) and $98,000 in my 401k. I am having trouble finding a job with a similar salary since the economy in my small city is far from booming (like everywhere nowadays).
I’m considering cashing out my 401k and paying down the principal on my student loan, fully aware that I will pay a huge penalty and will not be able to pay my student loan in full. I am also thinking about either putting the money into an IRA, but I can’t decide between a Traditional IRA and a Roth-IRA. Any advice would be greatly appreciated!!
Carol, NM
Dear Carol,
First of all, I’m really sorry to hear about your job loss. That’s always a tough situation, especially being a single mom. But don’t allow yourself to slip into feeling sorry for yourself. You’re obviously very bright, have solid work experience and if you get out and network and hustle, you’ll be able to find a sufficient job very quickly. If you’re already doing that…Great! If not, it’s time to update your resume, dry clean your best suit and hit the streets. And don’t be afraid to take part-time or temp jobs while you hunt for your new full-time career.
I strongly advise against cashing out your 401K. Things may feel overwhelming right now, but there’s no need to panic and make rash choices. If you prematurely cash out a $98,000 401K, you’ll immediately pay a 10% penalty ($9,800) and income taxes on that money (approximately $24,000). That leaves you with only $64,200 to pay down your student loan. So now you’re 42, have NO retirement savings, and still owe $19,000. This will not make your life any easier.
What I suggest is a direct transfer rollover of your 401K into a Traditional IRA. If you roll it into a Roth-IRA, you will have to pay the taxes on the full amount. I also recommend putting any extra debt payments on hold until you land a new permanent job. For now, tighten your budget and put all your energy into finding your new job.
I know you can do this! Thanks so much for your question.
- Clint
Have a tricky question Clint and Katy can answer about your finances?
Email it to Editors@PerkStreet.com
Clint and Katy Davis are PerkStreet Customer Columnists and founders of Davis Coaching. As financial coaches, their passion is helping people become and stay debt free! Their personalized coaching is designed to help you get your financial life where you want it to be. Like personal trainers for your finances, they can help you develop a specific plan to achieve your goals, and provide the expertise and accountability to get you there. If you’re ready to take control of your financial life, visit Davis Coaching online, check out the Davis Coaching blog, and connect with Clint and Katy on Twitter and Facebook.
-
Moijc1216
