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401(k) plan: Is it ever a good idea to make an early withdrawal?

401(k) plan has $38,000 and reader has $11,000 in credit card debt. But early withdrawal from 401(k) plan comes with hefty penalties. See question No. 1 in the reader mailbag.

By Guest blogger / June 9, 2012

In this March file photo, consumer credit cards are posed in North Andover, Mass. If you're run up $11,000 in credit card debt and can barely pay the minimums, does it make sense to make an early withdrawal from your 401(k) plan?

Elise Amendola/AP/File

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What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. 401(k) early withdrawal concerns
2. Soccer in America
3. Money, sanity, and in-laws
4. Keeping old magazines
5. Frugal vitamins
6. Tossing unhealthy foods
7. Divorce and credit
8. Switching credit unions
9. Preparing vegetables
10. Dealing with emotional old photos

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The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two. Our busy lives are crazy enough without having to compare five hundred mutual funds – we just want simple ways to manage our finances and save a little money.

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In an era where it’s so easy to just type out an email to someone, a handwritten letter seems a bit anachronistic.

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I love handwritten letters, and I usually think highly of whoever sends them my way.

Q1: 401(k) early withdrawal concerns
Are there some instances where it’s OK to take money out of your 401K to pay off your credit cards? I’m planning on going to medical school next year, a decade after graduating from college. I managed to save $20,000 before I was laid off a few years ago. I’ve since used all of that savings and the income from working part-time to take the necessary courses to prepare me for a new career in medicine. My classes are done, my applications are ready to go, and I’m working full-time again. Here’s the problem… I ran up $11,000 in credit card debt due to not being able to get Stafford loans for my last few classes and from a couple months of living expenses before I was able to find full-time work. I’m now in the position where I can afford my monthly bills thanks to a combination of regular work, overtime, renting rooms in my house and being really frugal. However, my job (which is great experience for my future medical career and has excellent benefits) only pays a few dollars above minimum wage per hour. I am not making a significant dent in that credit card balance, the card is at 8.9 percent interest, and I am barely able to cover the minimum payments of $400/month. I’m very worried about carrying that balance with me to medical school, when I will be living off of loans. I want to pay it off in the next year … but how? I have about $38,000 in my retirement account, and I own a home I could sell, but a Realtor told me I’d be lucky to break even on the sale. I can’t sell my car, which is worth about $5,000, because I live in an area with limited public transportation and need it to get to work. I’m at a loss. Please help!
- Jenny

I would never take out retirement money to pay off credit card debt (or any other uncollateralized debt).

The math makes it pretty clear. If you take $38,000 out of a 401(k) account early, you’re going to owe income taxes on it (let’s say 25% federal and 5% state, but it depends on your tax brackets) as well as another 10% as an IRS early withdrawal penalty. Your $38,000 immediately becomes just $22,800.

If you make minimum payments on that credit card you describe, it would take you a good part of a decade to recoup the loss you’re going to take just from that one 401(k) withdrawal.

Even worse, you can’t put that money back. You’ll have to make future contributions – and you’ll have to make more than you withdrew because of the gains you didn’t earn because you took the money out.

Don’t touch your retirement money until everything else has failed. You’re nowhere near that yet.

Q2: Soccer in America
Do you think world football will ever become as popular as baseball/football/basketball in America?
- Dennis

I think it’s heading there.

Major League Soccer is setting a new attendance record every year. It has higher average attendance than the NBA and the NHL. In some communities like Seattle, it’s incredibly popular. When I was in the Seattle area last year, I saw more Sounders jerseys than Seahawks jerseys.

The last World Cup matched the World Series in television ratings in the United States for some games, and the ratings for other games were comparable to the NBA playoffs.

The coverage of European football has also grown tremendously over the last decade. When I was a kid, I was vaguely aware that there were leagues in Europe. Today, I can name most of the teams in the Premier League without much effort, simply because the level of coverage in the United States is so much higher.

I don’t think this is a sudden burst and a flameout like the soccer craze was in the late 1970s. This has been a slow build for twenty or thirty years.

Q3: Money, sanity, and in-laws
I met my future wife almost 3 years ago, and we have been dating since then. I proposed in January, and we settled on a summer wedding during July of 2013. We figured that would give us time to pay bills, save some money etc.

Im 25, make between $50,000 and $60,000 per year, and have a couple outstanding credit cards, and a car loan. Total debt (including car which is about $13k, and student loan at about $4,800 left) about $20,000. She is 24, currently works for a friend at a tanning salon, and pulls in about $7200 per year if she is lucky. Total debt for her is about $7,000 of just credit card debt.

Here is where it gets extremely complicated. She wanted to go back to school (was dying to go back and get something she could use in a career, not just continue on with her dead end job at Starbucks.) So being young enough to not get financial aid, I offered to help. That being said, her parents also offered to help, but not financially. They offered to let us live with them while she is going to school and we are paying off bills.

So now we live with my future in laws. We are being extremely aggressive with our bill payoff strategy. I feel it is important that we get all of my revolving bills (credit cards) and all of hers paid off prior to the wedding, so as to not drag bad credit from her to me. She agrees whole heartily with this.

Originally when I proposed, I had every intention of paying for the wedding by adjusting our savings and bill payoff plan (I proposed about 6 months ago roughly). Her parents generously offered to pay for the majority of the wedding (the reception, looking to be about $12,000ish) So we chose a date, chose a venue and booked the venue with a rather sizable deposit. This has given me time to pay off some credit cards, and some loans and get my bills to a solid footing. About 3 weeks ago, however, my fiance and I were hit with a bombshell. Her parents who originally offered to pay for the majority of the wedding, let us know they were completely broke until at least March of 2013 (our wedding date is set in July of 2013) and even then, they may not be able to help much.

I felt crushed. I can only imagine how they felt telling us this after offering to begin with. We are still living with them, as we have absolutely no savings (again, aggressive bill pay offs). We have no money to move out, and will not have much saved by the time the wedding does roll around. If we stay living with her parents until about a month before the wedding, it may work out, but our sanity is taking a toll living with them. Add to everything else the fact that my fiance’s truck gets about 10-12 MPG on a good day, and has been getting worse….we are going to need to buy a different car for her. Looking at how much she spends in gas each month (about $250) it makes sense to get an older reliable car (2003-2005 Honda civic or accord) that gets almost triple the mileage of her current beast. Her monthly gas bill would be reduced by the amount of the car payment itself, the insurance, and even a little bit extra.

So here is the official, not so long winded dilemma. We have to between now and next July pay about $15,000-$17,000 in wedding expenses, save about $4,000 minimum for a honeymoon, buy a car that will cost about $8,000 (obviously this does not have to be paid for totally upfront) Manage to get SOME savings put away, just to move out (about $2,200 to move into an apartment and pay the first months rent with deposits and what not) and yet somehow, still keep our sanity.

Total amount to spend between now and July 2013= on the high side…$25,000 – or roughly half my yearly income. This is doable ONLY if we stay living with her parents until the last possible moment….But…our sanity like I said, is wavering.

Any thoughts?
- Bill

My big suggestion is to get married with a very small ceremony with just a few people, then have a party at someone’s house a few days later. Don’t spend five figures on a wedding. Similarly, skip the honeymoon or do something incredibly simple.

You guys are in a world of financial hurt. Don’t spend $20,000 on a giant party when you’re in this situation.

What about the deposit? The deposit is a sunk cost. Forget about it. Look at what you have to spend going forward and minimize it.

Q4: Keeping old magazines
I love to keep old food magazines. About every three months, on a rainy day, I’ll get out a big pile of them and choose a whole bunch of recipes to make over the next month or two. I just love making new dishes for my family!

The problem with this is storage. If you have a lot of old magazines like I do, they just take up space. Do you have any ideas for frugally handling this?
- Ellen

I do the same thing with food magazines, actually. I keep old ones for a few years and go through a big pile of them every once in a while to ferret out recipes.

My solution for storage is to use a couple document boxes. These are cardboard boxes that are sized to hold paper documents, and they work almost perfectly for magazines. I keep them stored in a closet.

Once every few months, I go into those boxes and pull out a big handful of the oldest ones. I go through them, pull out recipes I want to try (often by literally tearing them out), then toss those magazines. I then add the newest handful to the box on the other end.

Q5: Frugal vitamins
Our family eats reasonably healthy but also sees the value of vitamins and fish oil for my wife, kids, and myself. The kids take a daily multi-vitamin and fish oil gummy. Same for my wife and me, but in pill form. Do you all take vitamins/fish oil? Any tips on finding good deals b/c they’re mighty expensive.
- Leon

I do not currently take any vitamins. Instead, I just strive to eat a balanced diet.

Your best bet is to buy vitamins in bulk, shop around, and check for online sources.

More than that, though, I would go to my doctor at the next checkup and have a blood screening of all common vitamins and minerals. Use that information as a basis for what you should actually be taking. If you’re normal on everything, continue as you are, but if you’re high on a lot of things, cut back. (Similarly, if you’re low in a certain area, focus in on that area). It might be useful to do this after spending a month or so without the vitamins.

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