5 Alternatives to Early 401(k) Withdrawals!


Dear Farnoosh:

I know, the obvious answer to this is a resounding "NO", but hear me out.

I'm currently the sole breadwinner in my family, earning $90K a year. My wife stopped working 2 years ago, and it's been a blessing for her health wise, both emotionally and physically. She has a 401(k) through her former employer worth about $30K just sitting there, with no contributions going in. In today's economy, it is pretty much losing money every quarter.

In the meantime, on my sole paycheck, we are living paycheck to paycheck. We're not behind on any bills, but we have about $15-20K in credit card debt, a new $400 monthly car payment, and a $65K interest-only home equity loan that we can only afford to, well, pay the interest on. We have tried to keep the bills evenly split between mid-month and end-of-month, and we usually end up with about $600-800 each semi-monthly paycheck after the bills are paid to spend on food, gas, and other necessities. Not much with a family of 4.

My wife came up with the idea of cashing in her 401(k) to apply to all the bills as much as possible, focusing first on our credit cards and putting the rest towards the car loan, with a little to the side for savings (we have all of $500 in savings right now). We would then start fresh, create an actual budget and adhere to it, paying off the rest of the car loan and actually putting in principal payments towards the equity loan. My first reaction was no, because you're not supposed to use your 401(k) that way. But I figure, we're losing money on it anyway, and it would be the springboard we need. Once everything is paid off, we can start contributing towards a Roth or something.

Your thoughts?

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