Withdrawing from an old 401k to pay debt

[Brian Day]

Current situation - I'm 34 years old. A couple of years ago I rolled 75% of this 401k into my company's ESOP. I left that company in June of last year, but I was there long enough to be 100% vested. Since I rolled over my 401k money into the ESOP, it has grown exponentially. As it stands right now in the ESOP balance I have 3 times my annual salary (~300k). The company was also sold in June of this year, so this number should increase even more once we know the sale price this month.

In the old 401k where I rolled the 75% from, I still have 21k left in that account. I also currently have 11k in my emergency fund. I'm about to move out on my own again after going through a divorce earlier this year (living with my parents now). I want to take the 21k I have in my old 401k and use it towards paying a big chunk on my car (that way I won't have a hefty car payment plus rent for a while, save some more, and pay another chunk later).

Thoughts on this? I know I'll be paying around 8k in taxes if I withdraw the money.

[Charles Carillo]

@Brian Day

I would avoid withdrawing from a 401k. While you don't have a rent payment, you could work towards paying off the car very quickly and/or sell the car, and buy a less expensive one.

[Doug Smith]

I would avoid withdrawing the money at all costs. Not only will you take the big hit, but that's money you can't replace. Roll all of the old employer's retirement $ into a self-directed IRA with a custodian like Advanta IRA and then you can use that to invest in real estate or private lending...which is likely why you're on BP. I realize that you have a big car payment, but you can always go back to pull the money if things get dire for you, but you can't put it back.

[Tim Miller]

$8k in taxes is just the beginning of what you think you will pay. They will hit you with a 10% penalty come 2024 tax time, you're going to get hit with a whopping I owe the IRS how much?!

A fiend of mine didn't lesson and cashed out his 401k. It was about $50k, his check was for around $25k. The next year he owed the IRS just over $7k. It's not worth it.

Roll this over to an account without penalties and if you need take a loan on it. Good Luck!

[Jeffrey Dixon]

If you move the money to an IRA, you cannot take a loan from it.

[Basit Siddiqi]

I think it depends on how much your debt is, what interest rate it is and if the debt is hindering your ability(I.E. DTI Ratio is too high to buy a rental property).
Also, the feeling of paid off debt is a good feeling and helps ease the mind.

I wouldn't consider using the 401K to pay off a mortgage debt at a 4% to 5% interest rate
However, I would potentially consider using it to pay off credit card debt that is 20%+

Best of luck to you in your decision.

Even if you took out $50,000 from your 401K now, you would still have a good chance of having the balance of the 401K reach 1 million assuming a 6% return without putting in another dollar into the account.

[Steve Vaughan]

I'd definitely find another way to pay off the car.   Sell it and/or save aggressively.  

Plenty of well-running, functional used vehicles out there that would cost you less than this tax hit and 10% penalty. 

[Bette Hochberger]

Quote from @Doug Smith:

I would avoid withdrawing the money at all costs. Not only will you take the big hit, but that's money you can't replace. Roll all of the old employer's retirement $ into a self-directed IRA with a custodian like Advanta IRA and then you can use that to invest in real estate or private lending...which is likely why you're on BP. I realize that you have a big car payment, but you can always go back to pull the money if things get dire for you, but you can't put it back.

Agree!

[Caleb Brown]

As others said don't pull it out. Get rid of the car or aggressively pay it off. Pulling money out of your 401K will not fix your issue of buying a car that's too expensive. Don't get caught up trying to buy the newest car, make sure you can afford it so you are not stressing yourself out