I recently discovered old 401ks worth about $40,000. Should I cash them in to buy a house or pay off debts?

I have no income. My husband makes about 50k/year. We are about 20k in debt (credit cards/car/personal loan) We pay about 1700/mo rent. We figure paying off debts will save about $400-500/mo. in interest alone. Buying a house will allow us to build equity. Besides "how the heck do you forget about 401ks for so long!" do you have any advice?

You should know that if you "cash them in" you will have to pay taxes on it in addition to paying a 10% penalty for early withdrawl. That's $4,000 gone right there! I think if I were in your shoes I would pay off all debt and don't use the credit cards anymore...they will ruin you. You will still have about $10,000 left that you can use for a downpayment on a house. Getting a house is critical. When you rent all you do is make your landlord more wealthy. You also are paying higher taxes. So, my advice is to liquidate the account,pay off all debt and get busy on buying a house. Good luck.

Some 401k's allow you to take out a loan from the 401k. When you make payments on the 401k, you're basically making the loan payments to yourself. If a 401k loan is available, DO NOT cash in the 401k. Borrow the funds necessary to pay off credit card debt. Then, put together a budget that allows you to live without running the credit cards back up again.

I'll skip the "how the heck" question. :-)

I would advise NOT liquidating your 401k to pay off your CC debt and other loans. Here's why:

There is something in your life that got you into debt. Somehow, some way, you and your husband spent $20,000 more than you could afford. You own more stuff, did more things, or received more services than his salary could support. That's no mortal sin; lots of Americans are in the same boat.

If you took this windfall and paid off your debt, you wouldn't have fixed the real problem -- that you spend more than you earn. The typical pattern for this situation is that you'd be right back where you are now, but without another 401k to save you.

You must control your finanaces first. I advise that you take your credit cards, cut all but one of them in half, and put the other one in a desk drawer somewhere for emergency use only. Make a budget: figure out what you *must* pay each month, what you possibly *can* pay to your credit card bills, and leave behind the bare minimum to live on. For at least a couple of months, try to live on cash -- and as little cash as you possibly can.

Consolidate your debt to a lower interest rate and make a point of making more than the minimum payment, so you can get your debt down to ZERO. While you're doing this, try to have your husband invest in *his* 401k plan, by at least the amount that his company will match -- this is free money; you need to take it. Leave as little for you and your husband as you can possibly stand -- you must live frugally for a while to make up for the extravagances you took in building up your debt.

Once you've conquered your budget problems, you can address the other issues. You'll have generated a good credit rating and can buy a home -- it's a wonderful idea, but you have to do things in the right order. Owning a home will increase your expenses and if that drives you deeper into credit card debt, you'll ruin yourselves.

Leave the 401k alone. Make sure that's invested in something for the long term (you don't mention your age, but if you're 30 or so, then if you invest that $40k in a stock fund, you can expect that money to reach $750,000 to $1,000,000 by the time you and your husband are ready to retire. Leave it where it is!).

You're in a tough spot with your debt, buy you can climb out. Others are in worse spots than you and they recover. If you can get a little work on the side to bring in extra cash, that would be great. Hold your expenses down -- that's the most important thing -- and pay off that debt. It might take four or five years, but you *must* do it, or you will never truly control your own lives.

Good luck,

Doug

Listen to what Doug just said (above). He's right on the money!

You will probably pay a 10% penalty to cash in the 401ks, plus any taxes due if they are not of the "Roth" variety. So you should first know how much cash you would have in hand. Any very high rate interest you are paying on an INDIVIDUAL debt, like 20%+, would be a candidate for elimination.

Doug answered beautifully. Not much more that I can add. When you take a look at your loans and credit cards, put all of these onto a sheet of paper. Set up four columns. Name the columns, in order from left to right, name of creditor, interest rate, minimum payment and actual payment. Write out the names of your creditors in the first column. Write interest rate in next- with credit cards if there are several, you will know if you look on your monthly statement, add the rates up and divide by the number of rates; this is average rate for that card. minimum paqyment that shows on your statement. And what you actually pay..... Look at the interest rate. Put the highest interest rate on top, the next highest and so forth. Put minimum payments next to them all. Now, look at your actual payments, cut all actuals back to minimum on the second highest all the way to the bottom. Take all that extra and put it on top of the minimum for the highest card. You are keeping your credit good but you are paying one card, the one with the highest rate off first. When it is all paid off, roll that entire payment down on top of the next highest, til paid. Then the next, etc... I know this will help you, just as it has my clients. God bless.

If you are under the age of 65, you will lose about 30% of the $40K when you cash it in, it will also become taxable to you in the current year at your current (or joint) tax rate. If your husband makes $50K/Year your tax burden will be substantial. My professional recommendation is to keep the money in the 401(k) so that you have something to retire with.

If you are over the age of 65, I would recommend paying off the entire credit card debt and then cutting up the cards. Use the left over money for a down payment on a small house that you can afford.

I would pay off debt, cause you can't buy a house in a lot of cases due to debt to income ratio (you have more payments in debt vs the income you have coming in) or because of credit (and the more credit you have - especially if it's maxed out or near being maxed out, the lower your credit score). That way you can be debt free & have a better chance of buying. So all in all, it's a win/win.

Pay your debts. Don't email Marty for a subprime loan. Go to a legit nbank. Use the other money to buy a house. As long as your credit stays healthy you will be able to qualify for a decent loan.

pay off your debt!! and then decide what to do. take a vacation ?

If your debts or any part of them are on credit cards you are paying a crazy rate of interest. Whether you use the 401ks or get a loan just for the purpose - pay them off before you do anything else.
Buying into property has been too good to be true in many countries for far too long. It now looks as if there is a serious 'bubble' in the market, and you could lose money, not gain it.

At the present time you should certainly not look at housing as a money making investment. Pay off the debts.

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