My husband is about to leave his job for a new one. He has about $6800 in a 401(k). We were looking at taking it out in a lump sum, to pay off our debt. I know there is a 10% penalty for taking it out
Answers | 4
My guess is you could work on a budget so you can pay down that debt on your own without giving extra money to Uncle Sam.
If your credit card interest rate is higher than the 10% tax penalty, then you may come out ahead in the short-term. But, there is a huge long-term cost.
You need reliable transportation to get to work on time so that you can earn a living and replace your 401k balance as quickly as possible.
Don't get an income tax surprise next year! BE SURE TO CHECK your "marginal" income tax rate and make sure that it's really only 10%. People get that confused with their average income tax rate which is the amount of tax they pay divided by their taxable income. Your marginal rate is important because that is what determines the amount of tax on your highest dollar of income (in your case the rate you would pay for your 401k distribution).
You can check your marginal income tax rate here: http://www.irs.com/articles/2015-federal-tax-rates-personal-exemptions-and-standard-deductions .
Depending on how much longer you work, and your investment return, that $6,800 if left in your retirement account could mean as much as $6,800 per year in income at retirement. That's the huge long-term cost.
Track your income and expenses so that you and your husband can make informed decisions about how important it is to continue those behaviors. You may find that you could agree on a change or two that could help you save more toward an adequate cash reserve and retirement.