It’s time for another edition of Dollar and Cents. This is where I answer one of your questions.
Here's today's question:
I have recently found out our plant will be closing in about 12 months. I have $18,000 in credit card debt. I already have a 401k and Profit Sharing from my previous job that also closed (over $100,000). I have left it with my previous employer because there are no admin fees.
I have about $30,000 in my 401k at my current job. My question is….should I take just $18,000 out of my 401K when we close and pay off that debt and immediately take the remaining amount and place in an IRA?
Work in our area is slim pickings but I have been looking. I have been employed since I was 16 and now just turned the horrible 40 🙂 I do not want to be living on unemployment and struggling to pay that debt. Bankruptcy is NOT an option. I created that debt and it is my responsibility to pay for it.
I have also want to bump up my 401k contribution…but with the upcoming event and debt, I am not sure that is a good idea. Your advice on this would be great. Thank you for your time!
With each Dollars and Cents video we want to provide some follow up links where you can get some additional information on the topic. If you are interested in learning more on how to handle unemployment, how withdrawing early from your 401k works, how to take a 401k loan, or how to tackle a large amount of debt, here are some good reads:
- How to Tweak Your Budget When Unemployed – If you know unemployment is coming you should start tweaking your budget heavily now in anticipation of that income disappearing. Get used to living on less now and try to save up some extra cash. And don't be afraid of immediately applying for unemployment benefits; the unemployment safety net is there to be used.
- The Dangers of Using Credit Cards as an Emergency Fund – …which leads us to this post. If your income goes down (or disappears all together), it can be easy to whip out that piece of plastic to pay for it later. There are huge risks to using your credit card as an emergency fund.
- 401k Early Withdrawal Penalties: What You Need to Know – Withdrawing from a tax-deferred account like a 401k before retirement is going to lead to a lot of money lost to penalties and income tax. Those two things can take a 35% cut out of your withdrawal. That is, unless you qualify for …
- 6 Ways to Claim Your 401k Early and Penalty-Free – Okay, so the first thing on the list is your death… but honestly, the list gets better after that. Or you can look at…
- 401k Hardship Withdrawal Rules – Digging a little deeper on what qualifies as a hardship and how you can use them to get out of the penalties from withdrawing your 401k early.
- How to Withdraw Money from an IRA Penalty-Free – If you were asking how to withdraw from an IRA instead of a 401k, these rules would come in handy.
- Can You Rollover Your 401k to a Roth IRA – Our reader also asked about potentially withdrawing the funds to pay off debt and putting the rest in an IRA. Hold on! Big difference between withdrawing and rolling over to an IRA. Here's info on rolling into a Roth IRA, our favorite retirement account.
- 4 Reasons You Should Rollover Your 401k to an IRA – There are some compelling reasons to do a rollover. Here are four for you to consider.