Hello,

I have a current 401(k) with a balance of approx $25,000... Well it was worth that much before today's terrible day on Wall Street! My question is this... I am in debt to the tune of $20,000 (credit cards) and living paycheck-to-paycheck. I will soon be starting a job with the Federal Government and making about $100,000 per year. When I move to the government, instead of rolling over my 401k, I want to cash it in and pay off all my debt. Then I will put 10% of me new paycheck into the government's Thrift Savings Plan (TSP) via payroll deduction. I know I will be penalized for cashing it in, but will it be worth it to pay off all that debt, allowing me to put 10k a year from my new job into the TSP? Most of my credit cards are high interest. Also, how much will I be penalized? Will it come out right away, or when I file taxes in April? If it is worth 25k, what will I get up front if I cash it in. Any advice?:confused:

I don't know what your tax bracket is but the 401(k) distribution will be taxed as though you earned it -- if you made $100,000.00 then you will be taxed on $125,000 plus 10 percent will be withheld from the proceeds --- not knowing you tax bracket but if it's 28 % your net will be 100 % MINUS 10 percent MINUS 28 percent. If you took 20 - 23M of your anticipated gross of 100M with your new job, you could pay off the debt very quickly, avoid giving your money away in penalties plus it would continue to accumulate tax free if left either in your current plan or rolled over to some other tax sheltered plan. It's a no brainer if it were my decision.

Approach your employer about the possibility of getting a loan against the money in your 401k rather than simply withdrawing from the plan. This way, you can avoid the Internal Revenue Service's taxing penalties for accessing your account before you've reached the standard age of 59 1/2. Employers with loan programs in place will usually lend the money at an interest rate commensurate with the interest the money is earning while tied into the 401k. ;)

Talk to your 401k administrator about accessing your Summary Plan Description (SPD). Here, the terms under which you are permitted to withdraw money in your 401k account early will be laid out. Generally, you must be facing significant financial hardship to qualify for early access to your 401k money.

Withdraw only as much as you need to pay off your debt if, in fact, you do qualify to withdraw from your retirement savings plan. If you are under the age of 59 1/2, you will normally be facing a 10 percent penalty on the amount of the deduction, in addition to standard income tax rates on the amount of money you take out. While there are ways to avoid these penalties, they require you to draw the money out in annual installments, which will generally not be helpful to people looking to pay off debt month by month.