401k Early Withdrawal, I know this a big No-No, but please hear me out
I have a client who has an old 401k (he is 49 years old) with around $215,000 in it currently. He switched jobs and now works at a school district and is going to open up a 403b. The debt he has accumulated over the years makes it seem as if he may never be able to get out of this. Here is what his debt is:
– Loan against his 401k = $30,000
– HELOC = $37,000
– Credit Cards = $30,000
– Consolidation Loan = $20,000
He is a new client of mine and did not have interest rates available, he is coming in next week with that information. We obviously need to tackle this debt, as this is weighing on him. He has no savings and very little in the checking account as well. He spends his disposable income on all this debt and his wife is not currently working.
With all of this, I obviously do not want him to lose his 401k assets, but would it make any sense to anyone to at least withdraw enough to cover his CC debt (that is most likely the highest interest-bearing debt) and then use that monthly expense to pay more on the Consolidation Loan and so forth?
I am trying to figure out other ways for him, but he needs a plan and a plan that he can stick to, as with all of this debt currently, and with minimum payments, he may never be able to retire.
Thanks!
Permalink Submitted by Alan - IRA critic on Fri, 2023-04-21 22:31
If the 401k loan is with the employer he just left, they will expect it to be paid off fairly soon or they will issue a 1099R for it. He would owe tax and penalty, but to offset this he would have until next year’s tax due to repay the loan to eliminate the taxable distribution, which he probably will not be able to do. That’s 30,000 in taxable income plus any amount he wants to withdraw from the plan to pay off high interest debt. Perhaps he should not contribute to the 403b when such contributions will force him to take more taxable distributions plus the 10% penalty.