401k cashing out dilemma

On tv the other day, a lady asked Suze Orman if she should cash out her 401k worth $125,000 to pay off her $125,000 debt.  Suze mentioned a good point why the 401k should stay where she is.  Computing the penalties (about 10%) and taxes the lady will have to pay on that $125,000 withdrawal, she’ll only end up having about $60,000.  Yikes!  That would be a great waste of money.  The $60,000 is not even enough to cover half her debt.  And check this out.  The lady had previously taken out a $30,000 loan from the 401k. If she closes out her account, she’ll have to pay an additional 10% from that loan. Double yikes! So pretty much, the advice was to leave her money in the 401k. She was told to consider filing for bankruptcy instead because the 401k is protected from bankruptcy.

I’ve never taken money out from my 401k, whether its a loan or withdrawal.  I’ve been tempted, believe me. A few years ago, when we considered buying a home, we even put the money in the 401k out as source of emergency income.  Thank goodness we didn’t buy a home. Whew! (That’s a totally different post altogether.)

My co-workers have told me about taking out loans from your 401k and said that you end up paying yourself the interest, so its not too bad.  Well, I thank God I never really had to take a loan out yet, but I’m too scared to do it anyway.

Things are finally making sense. When I started contributing to my 401k, the thought of the economy being the way it is right now was totally inexistent. The reason why its called a hardship withdrawal is that they want you to keep your money there until you’re ready to retire.  With all the penalties and taxes, it may seem unfair to pay extra for your own money. But the truth of the matter is, the whole point of a 401k is to save for retirement.  It’s the money that you will live on when you either get too old to work or too tired to work.  Unfortunately, bills will never disappear no matter how old you become. It would be nice if you have someone who can take care of you, but what will happen if you don’t? 

Ultimately, it’s your money, it’s your decision.  If you decide to cash out your 401k, just consider all your advantages and disadvantages.