“Don’t put your retirement on a credit card.” – Suze Orman
I recently read in the news that a guy emptied out his 401(k) to have enough cash to go see Super Bowl LII. That’s insane.
That is the financial equivalent of throwing all your money in a trash can, pouring gasoline on it, lighting a match, throwing it in, and setting it on fire.
The only time you should cash out is when you hit it big in Vegas at the poker table. Otherwise, just walk away and don’t do it.
You can buy the whole Supernatural series on Amazon.
Well, in this case the other guy is the IRS. Since, the rules have recently changed you better make sure you learn them as there is no playing the feds.
This is not a game of craps where you just shoot the dice. This is for real.
Your future self is depending on you to do the right thing in the present.
The economy is still getting its act together, but in the meantime you still have responsibilities. I get it.
Millions are people are struggling with debt.
Americans owe about 2 trillion in credit card and student loan debt.
Many are just trying to keep their head above water.
Be forewarned, that even if you have good intentions, cashing out to pay college tuition costs for the kids or grandkids is a big no, no too.
You cannot finance retirement, but your kids can finance their education. Just limit what you borrow.
I know someone living on a fixed income. She was short paying her property taxes because she owed over $25,000 in credit card debt!
She was scared she would lose her home if she did not pay. She was shaking and crying it was so bad.
I gave her the part where she came up short. You see, she gave me a place to stay many (16) years ago. I had not forgotten. And I never forget a favor.
The good you do can definitely come back to you full circle.
I had a chance to repay her for her kindness and I took it.
Full disclosure: she is an 86-year-old grandmother who got into debt helping her grandkids.
I am not saying not to help your kids. Just be mindful what can happen if you do and you are not financially able or prepared.
Here is what I want you to know.
Cashing out means the following:
- Paying a 10% federal tax penalty on the money you withdraw
- Every penny is taxed as ordinary income (negating any pre-tax gains)
- Any 401(k) loan money you repay is going to get taxed again
- Every dime you take out is unable to earn interest for the future
- Present pleasure will not erase future pain and problems when the money is not there to help
- Every dollar is unable to turn into two from compounding over the years
I know people will switch jobs or attempt to stave off bankruptcy, but I am telling you this is not the way to do it.
Just like there is a way to structure your leaving a job, there is a way to structure how you repay your debts.
Did you know your retirement accounts are protected from creditors?
There’s a little tidbit many creditors will not likely tell you. Well, I am letting you in on the recipe of the secret sauce.
You can learn even more about money and debt by clicking on any of the book links in this post and purchasing.
If you cash out, that money is up for grabs. You are all in and could lose to the house.
The decks are stacked against you in this standoff with the banks as you have nothing left to bargain with once you have exhausted all your resources.
That is why it is best to put down no more than 20% on a down payment on a home.
If you decide to do more, like, say 35%, and the market tanks, you could lose your shirt and every dime you put into the property!
That’s too much skin in the game.
You could also lose your home, literally as well.
Once the money is cashed out, it’s gone forever.
If you cash out to pay off credit cards, medical bills, or back mortgage payments then that’s all folks.
The money is spent. You can’t get it back. And if something else goes wrong, then it’s game over.
All of those things can actually be discharged and wiped away in bankruptcy.
You are; however, still responsible for child support, alimony, back taxes, fines, penalties, and restitution you owe for breaking the law and student loans.
So, you could cash out, pay the credit cards and mortgage, and still get into financial hot water again should a medical or some other type of emergency arise.
You are far better off going ahead with a bankruptcy than breaking the 401(k) piggy bank.
That is, if you truly can’t afford to make the payments and pay your debts.
When your financial back is against the wall a bankruptcy may be your best course of action not cashing out your retirement.
A chapter 13 bankruptcy can possibly even help protect the equity you have in your home.
The money in your retirement account is protected from bankruptcy.
That means if you have $1 million in your 401(k) and go into personal bankruptcy due to owing $100,000 in medical bills the banks and courts can’t touch it.
When you cash out you are likely to pay 35% of the balance of the funds you withdraw.
There is even a possibly after the taxes and penalties are paid, you will not have enough left over to pay the debts you wanted to pay off!
All that work and you still get the short end of the stick.
When the chips are down, just leave them on the table and walk out. Do not add in more chips!
Whatever you decide, make sure cashing out is the last Hail Mary pass in your financial playbook.