401k Advise

[deldran]

So I might be moving to a new job soon.
I am looking for some advice on what to do with my 401k.

I have been doing some reading and I see i have 3 options.
1.) roll into new employers 401k plan
2.) roll into an IRA
3.) cash out.

I understand for long term options 1 & 2 are better, but i am young and do have some debts. I would like to be able to buy a house in the next year or two but have no savings and unfortunately have to many bills to really be able to really save any substantial amount of money at the moment.

I live in Illinois and have ~18k in my 401k at the moment. Here is my thought process on possibly cashing out. or aka my options of what to do with the money.

1.) use all the money left after taxes to put toward down payment on a home. I would really like to do this but do not know if it is the best option as most homes that would fit my family and my lifestyle would likely be to much for me to afford without getting a room mate or two.

2.) Use the after tax money to pay off my car ~10k and a small student loan ~5k. This would essentially free up 500 dollars a month in bills. which would allow me to pay off credit cards quickly and then aggressively save for down payment on a home.

I know the wise choice is likely to roll the 401k over and continue to put away for retirement. but i would really like to make a dent in this substantial amount of debt I have. I can get by as is but its pay check to pay check and if we move my rent will go up since I will likely not have roomates.

I am just looking for ideas and opinions. I personally have been pretty bad with money management in the past and I am working on trying to improve that aspect of my life.

Thanks

[bjl584]

I'd roll it into an IRA. You will have many more options of fund choices with which to invest in. Cashing out a 401K isn't a good idea. You need to get to the root of your bad money skills and fix it. A 401K is for retirement not for short term debt repayment.

[Petunia 100]

My advice is to get a handle on your spending. Track your money, and make a budget.

Losing half of your 401k balance to taxes and penalties will not solve a spending problem.

If you have credit card debt, a car loan, student loan debt, and have trouble saving, you are not ready to buy a house. The down payment is only the beginning.

Best of luck to you.

[disneysteve]

I agree with the others. Roll it into an IRA.

DO NOT cash out your 401k. It is a HORRIBLE idea and won't fix your problems anyway. Think of it this way. Would you take out a loan at 35-40% interest in order to get money to pay down your debt? Obviously the answer is no but that's essentially what you'd be doing if you cashed out your 401k. 10% goes to the penalty. 25% goes to federal taxes. If you have state income tax, add that in too. At best, the 18K will net you about 11K and possibly less. You'd be voluntarily handing the government $7,000 for absolutely no reason.

Focus on slashing expenses and throwing every extra dollar at your debt. Once the debt is gone, keep stashing away money for your 6-month emergency fund and then your down payment. Don't buy a house until you have a 20% down payment and can get a mortgage with a monthly payment (with taxes and insurance) that doesn't exceed 28% of your monthly income.

[dczech09]

Here is my thought process on possibly cashing out. or aka my options of what to do with the money.

1.) use all the money left after taxes to put toward down payment on a home. I would really like to do this but do not know if it is the best option as most homes that would fit my family and my lifestyle would likely be to much for me to afford without getting a room mate or two.

2.) Use the after tax money to pay off my car ~10k and a small student loan ~5k. This would essentially free up 500 dollars a month in bills. which would allow me to pay off credit cards quickly and then aggressively save for down payment on a home.

I know the wise choice is likely to roll the 401k over and continue to put away for retirement. but i would really like to make a dent in this substantial amount of debt I have. I can get by as is but its pay check to pay check and if we move my rent will go up since I will likely not have roomates.

I am just looking for ideas and opinions. I personally have been pretty bad with money management in the past and I am working on trying to improve that aspect of my life.

Thanks

1.) You have debt and you admit that you have been pretty bad with money management. So a house it out of the question right now. Save for a down-payment, have an emergency fund fully funded, and have no other debts before you even THINK about buying house.

Also, you need to improve at money management. If you don't home ownership will crush you.

2.) Like DS pointed out, your $18k in the 401k would turn into about $11k after the 10% penalty and taxes. So you would only have enough money to pay off the car loan. However, you would be paying it off by essentially borrowing money at 35% to 40% interest!!! Bad idea!

You admit that rolling over the 401k would be the wiser choice. And this is correct! Roll over the 401k to a Traditional IRA- you can get more investment options that way. Continue investing for retirement; you should be investing 15% of your gross income.

Use the rest of your income to aggressively pay-off your car loan and student loans.

Then fully fund your emergency fund to 3 to 6 months of expenses.

Then save up for a down-payment on a future house. Save AT LEAST a 20% down-payment!

Under no circumstances should you cash out your 401k. That is only recommended in extreme situations, like avoiding a bankruptcy. You are not in that bad of a situation.

[Dsquared513]

I'm sure you probably just wanted to bounce this one idea around and not be told how you are mismanaging your entire finances, but unfortunately everyone is probably right. Just to answer your question though, if you don't have the extra money to save each month then you don't have the extra money to own a house. Aside from just the loan and interest you have to pay mortgage insurance, homeowner's insurance, property taxes, plus utilities like water, sewer, and garbage which are probably included in your rent right now; not to mention when(not if) an appliance breaks or you have plumbing or electrical issues. Just because a bank will approve you for a $200000 loan doesn't mean you can afford a house. Paying off your debt is like losing weight, there's no quick and easy solution. You have to make the non-lazy choices and be frugal and understand the long term because when your are paying small monthly amounts on huge debts it can seem overwhelming and hopeless, but every bit extra you can find to put towards it gets you that much closer. There are ways around the 20% down on a house, but if you don't have any savings then the first emergency that hits your household will destroy you, financial and emotionally. The reasons to not cash out your 401k are clear from the other posts, although remember you have to pay taxes on it eventually anyways so the taxes don't really count against the idea except for compounding the interest. Good luck getting out of debt, it's much less stress.

[jIM_Ohio]

You might be able to zero out the debts, but this did not address the behavior which led to the debts in the first place.

Fix the behavior, then make a decision