Withdrawing from an old 401k to pay debt
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.


- Lender
- Tampa, FL
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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.

$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!

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

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.

- Rental Property Investor
- East Wenatchee, WA
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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.

Quote from @Doug Smith:Agree!
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.

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