is a lump sum distribution on a 401(k) ever a good idea?

please help settle a debate.

my point: with taxes and penalties it's just not smart. besides, what the heck are you going to do for retirement if you don't start now!

"other's" point: if you're broke and have bills and the economy is BAD, use the money to get out of the hole so you can breathe.


edited for my bad spelling

Message edited 6/11/2008 9:57:54 AM.

Re: is a lump sum distribution on a 401(k) ever a good idea?

no matter what- I would never touch my 401K

I just pretend it's not even there- it's not part my "money"

my opinion is- once you take it out- it will never go back in

Re: is a lump sum distribution on a 401(k) ever a good idea?

Re: is a lump sum distribution on a 401(k) ever a good idea?

I am not sure what the debate is?

If you are about to forclose on a house and need immediate cash, then maybe.

But you are paying taxes on the lump sum in addition to a 10-15% penalty.

Maybe if you take a hardship withdrawal (pending forclosure would probably qualify), this would waive the penalty. But you still pay tax.

So IMO its never really wise to withdraw on your 401k.

I have taken short-term 401k loans in the past that have worked out OK, but I only do this on rare instances. Like when I was buying a new house, I needed some temporary cash for the downpayment to close on my new house. I wanted to close on the new house before I sold my old house. I was well into contract on my old house and I knew the deal was going through. I took the 401k loan out for maybe 3-4 weeks. Paid it back when the property i was selling closed.

401k loans aren't as bad as withdrawals since you can put the money back without penalty.

Re: is a lump sum distribution on a 401(k) ever a good idea?

Never touch the 401k! leave it alone.

you will regret it when your older.

Re: is a lump sum distribution on a 401(k) ever a good idea?

Re: is a lump sum distribution on a 401(k) ever a good idea?

To cash out is a bad idea.

401(k) loans are not so bad.

Re: is a lump sum distribution on a 401(k) ever a good idea?

Re: is a lump sum distribution on a 401(k) ever a good idea?

note: not for a foreclosure... just consumer debt.

thank you, all!!

this is a debate i've been having with my sister who wants to "take the money and run" and i'm doing my best to talk her out of it.

i just wanted to double-check with other opinions, just in case there was a loop-hole i wasn't aware of.

again, thanks

Re: is a lump sum distribution on a 401(k) ever a good idea?

what kind of debt is it? credit card debt? tell her to balance transfer it to a new 0% card

Be responsible. Taking money out of your 401k to pay credit card debt is the wrong move.

Re: is a lump sum distribution on a 401(k) ever a good idea?

always a bad idea.

Re: is a lump sum distribution on a 401(k) ever a good idea?

Never a good idea!

Re: is a lump sum distribution on a 401(k) ever a good idea?

My friend actually did this, and yes, we all thought he was crazy.

He's an accountant though, and he figured out all the penalites vs the interest rates he had on his credit cards, and it worked out for him.

Re: is a lump sum distribution on a 401(k) ever a good idea?

We took $10K out of DH's 401K for a downpayment on our house and it was a good decision for us. We didn't pay a penalty because it was a first-time home buyer's exemption. We did pay taxes on it.

For us, it was a good decision, we would not have been able to buy the house otherwise. DH was also 26, so we have plenty of time to build back up our 401Ks.

Re: is a lump sum distribution on a 401(k) ever a good idea?

Message edited 6/11/2008 1:46:08 PM.

Re: is a lump sum distribution on a 401(k) ever a good idea?

I heard a story on NPR that "hardship withdrawrals" from 401Ks & other tax break retirement accounts were up 16% in the first quater of 08 compared to the fourth of 07. Accoding to all of the pro's they interviewed its really NEVER a good idea. The scenario they gave as a possible valid reason is-
you are diagnosed with a rare terminal illness, there is a possible cure but its not covered by insurance-you have no other way to pay & its the only chance to save your life. If you don't try it you'll be dead in 12 months.
They said that would be a good reason, nothing else not even foreclosure is a good reason, possibly a loan but never a cash out.

Message edited 6/11/2008 1:54:47 PM.

Re: is a lump sum distribution on a 401(k) ever a good idea?

As stated before Loans are OK, you are paying yourself back with interest. A cash disbursement is a terrible idea, tax and more tax........

Message edited 6/11/2008 1:55:55 PM.

Re: is a lump sum distribution on a 401(k) ever a good idea?

I wouldn't do it. But, here's a story of how it worked out well for someone: more than a few years ago a friend cleared out her 401k to use as her downpayment on a home. I thought she was out of her mind. Her home has more than quadrupled in value.

Re: is a lump sum distribution on a 401(k) ever a good idea?

Almost never a good idea. It worked okay for me but only because I cashed out a very small account. I was at the job for 2 years and 403(b) and I hardly put into that account. When I cashed out, it was a few thousand dollars but it helped me to start my law practice. I already had a thrift savings plan account from having worked in the government. I have never touched that money. Now that my law practice is going, I am saving for retirement again and still have the thrift money. The small 403(b) that I cashed out will not really hurt me. I would never take all of my retirement and run, though.

Re: is a lump sum distribution on a 401(k) ever a good idea?

Re: is a lump sum distribution on a 401(k) ever a good idea?

I was always the person telling not to touch a 401K EVER.

Yet, a few years ago, a series of events happened and my interest rate on my CC was so high.

I decided that the interest rate on a loan on my 401k was much better. BUT I did make a commitment to repay. I had a stable job. I payed it back in full even before term and got no penalty.

It worked perfectly for me to get me out of this mess.

Remember that you have pay this loan back whether you leave your job on your own or are terminated. Which in the later REALLY $ucks.

I don't recommend a cash out to start with. Start with the loan if you have to. But remember you have to make monthly payments. Just like any bill. Mine was deducted out of my paycheck at the time.

Re: is a lump sum distribution on a 401(k) ever a good idea?

Loans are not as bad as withdrawals- but they should still be a last resort also.

If you lose your job or quit or retire before the loan is paid off, you are given a few months after you leave your job to pay it back in full, or else it "defaults", and you lose that money from your account, and it counts as taxable income.

Also, while that money is being borrowed, you lose out on making earnings on that money. So even though you are paying the loan back into your account (with interest), you still lose money in the process.

Re: is a lump sum distribution on a 401(k) ever a good idea?

Message edited 6/11/2008 4:33:19 PM.

Re: is a lump sum distribution on a 401(k) ever a good idea?

Re: is a lump sum distribution on a 401(k) ever a good idea?

Never, ever touch your 401(K) in a lump sum- no matter how bad it gets. I mean if you are facing bankrupcy, then maybe but find a way to borrow against it if you have to.

Message edited 6/11/2008 5:22:15 PM.