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ko03581 · Jan 21, 2008, 01:28 PM

I will try to summarize my situation. 56 years old and terminated by my employer. Have 150K in 401k plan. Owe 78K on mortgage (9 years remain). About 12K of credit card debt. Can I qualify for penalty free lump sum distribution or take a monthly distribution penalty free? I would like to pay off the 90K in debt and roll the balance over in an IRA. Does any of this make sense to consider? Doubtful, due to health and age, that I will secure a job at even 50% of salary I am accustomed to. Spouse works full-time and able to support the two of us on her salary (IF, we get out of debt). She is 8 years younger and has amassed 25K in her 401k. I am diabetic and have genetic complications that imply my life expectancy may not exceed 65 or 70 at the latest.

Thanks

TEO

ScottGem · Jan 21, 2008, 01:34 PM

The hardship stiptulation is just to allow for the withdrawal, not to avoid the penalty.

Lets assume that you do take out 90K. You will still incur $9K in penalty and, at the least, another $15K (probably more) in tax liability. So, you will another $25K by April 2009. If you take that money out of your 401K, that will just increase what you will need at that point. In addition, you will be losing, not only the income that money can generate, but a tax deduction for your mortgage.

No taking the money from the 401K doesn't make sense to me. I would recommend rebudgeting.

ebaines · Feb 8, 2008, 02:28 PM

Correction to Scott Gem's post: since you are 56 and just terminated, you meet the exception for the 10% penalty on early withdrawals. If you are separated from service in the year you turn 55 or later, you can make your withdrawal from your ex-employer's 401(k) plan without penalty (although you will have to pay regular income tax on the distribution, of course). This only applies to withdrawals from your 401(k) plan at your ex employer - this exception does not work for withdrawals from an IRA, or withdrawals from a 401(k) at a previous employer that you may have left before age 55. So do not roll your 401(K) to an IRA, or you will lose this benefit. I agree with the rest of Scott's post regarding the wisdom of using this money to pay off your mortgage.

ScottGem · Feb 8, 2008, 05:24 PM

Whoops, I missed the over 55 thing.

ko03581 · Feb 9, 2008, 05:01 AM

Thanks for the advice. However I am not sure I can take it. I will have a monthly income shortfall of $1,500 for the next 9 years until mortgage and credit card debt is resolved. By paying off mortgage and cc's now from the 401k, I can survive on working part-time at minimum wage supplemented with the modest pension of $500 month, living better if working at a more lucrative job until SS kicks in at age 62 or 65.

ScottGem · Feb 9, 2008, 08:12 AM

You have to weigh the money you will lose by taking the 401K early (tax liability, lost of investment income) against the costs of the credit you currently have. Generally, taking the 401K will cost you more.

s_cianci · Feb 9, 2008, 08:21 AM

The $60K that you'd be rolling over into an IRA should be exempt from penalty. But you'd probably have to pay the penalty on the $90K that you'd be using to pay off debt. One trick that may help would be to not pay off your mortgage in a lump sum but rather continue to make the monthly payments from the $90K like you would normally. That way you'd at least be able to deduct the interest from your taxes. You'd lose that if you paid off the mortgage in a lump sum. Pay down your credit card debt as fast as possible since there's no tax advantage with that and the interest rates are typically much higher than with a mortgage.