[Adam]

I recently lost my job and my new job pays about $1300 less each month than the last one. I also have $15k in credit card debt. Things were getting out of hand, so I got into a debt management program about five months ago, who helped me set up a budget, reduce my interest rates, and move forward. The cards are all cut up, the accounts are closed, and everything was fine, but based on my old budget.

I am 26 years old and have $23k in my 401k from my last job. I'm wondering if it's a good idea to cash out the 401k to pay off my debt. Right now, it would save me $550 a month in my payments to the DMP. I'm working on getting another part-time job, but even that may not help ends to meet. I'm a homeowner, but don't have enough equity to get a HELOC, and my paychecks are NOT enough to cover everything. I'm living paycheck to paycheck and will have to cut into my savings very soon to keep going.

I have 35+ years left to save for retirement, but will I be screwing myself if I cash out?
I have already tried to renegotiate the payments through the DMP, but I would have to be on the plan for a year in order to qualify, and even then, it would only be temporary. Selling the house isn't really an option, as I would probably lose money on that deal, with the market this bad. I have cut all ancillary expenses (cell is the only phone, have an efficient car that gets good mielage, I live on ramen noodles). I don't want to lose the house and I don't want to file for bankruptcy. I wouldn't even consider doing this, but my income right now monthly is $700 less than my expenses. I'm working overtime, trying to get a part-time job, mowing lawns in the neighborhood for extra cash, etc. but there seems no end in sight. Paying off the CC debt would free up $550 a month, and I know the tax penalties are outrageous, but I'm running out of options. (Can't bike to work for lack of bike and the fact that it's 30 miles each way)

[CountryMama]

Yes. You'll pay up to 50% of the account value in taxes and penalties and eliminating your savings to pay off a credit card that was likely used for dinners, trips, etc. - non-tangible stuff that is long gone.

Rollover your 401K into a no-fee IRA, and forget about it. Get a second job - that's a great idea - and cut your expenses to next to nothing. Can you sell your house and move into a cheaper apartment or get a roommate? Sell your car and buy a cheaper used car (or bike to work)? Eliminate cable, cell phone, and other discretionary expenses.

[kapn]

Yep.............messing with a 401 is expensive......and stupid...........do the math...........what would the 23K be worth in 35 years.............

[Jackie]

Is it possible to renegotiate the payments through the debt management program? I would explore that avenue. If you cash out a 401(k) before 59-1/2 you may be hit with federal tax penalties.

Also, if the 401(k) has stock funds in it - now might not be the best time due to current market conditions.

[Jeff]

You say you have 35 years left to save for retirement.

Think of that another way: You have 10 years to save for a house, and do it right.

If you've already cut everything, but still spending more than you make, then you have to sell something to keep going. At this point, it's either the house or the 401K.

I say sell the house, and live in the cheapest apartment you can suffer through, instead of cashing the 401K.

Then, 5-10 years from now, when you get your finances under control, then you can go house hunting again.

[Steve R]

Do not cash out your 401K, you'll get about $14K which will NOT pay off the debt.
You don't say how much you make, which would help in giving you good advice.
If you received more than $1000 tax refund for 2007 taxes, then you can change your W-2 form to get more money in your paycheck. Add 1 allowance for every thousand dollars you received. e.g. $3000 back - 3 allowances.
I did this when I got my first house - it allowed me to eat each month.

Even if you do pay off your CC debt, you are still short $150 each month for expenses, so it's time to redo the budget and get your spending under control.