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  • Cash out 401K

    I am 33 and will be starting fellowship this upcoming July and will be making about 75k for the year. I have roughly 41k in a 401K from my soon to be prior employer that I need to figure out what to do with. My base living costs (insurance, one car payment on a Toyota rav4, two kids preschool tuition, internet/cable) is about 4500 / month. I am thinking about cashing out the 401k and using it for living expenses during fellowship but am not sure if this is the wisest idea as many people have advised against it. My reserve about not cashing it out is that cash flow is going to be an issue next year and I would prefer not to rack up credit card debt. The other kicker is my student loans will come due starting half way through the year. I would have to do IRB and it looks like an additional 400-500/month. I am in a high paying specialty so when I finish I should be able to recontribute quite a bit to retirement every year.

    Other related questions...

    (1) Can I take out partial disbursement and roll the remainder over (ie: take out 20k and put 20k in a rollover IRA)? Even an additional 15k (after taxes and 10%) would allow us to breathe a bit more during the fellowship year.

    Any advice is greatly appreciated!


  • #2
    You would have to take the 10% penalty, so I would advise against it. Do your best on $75,000 a year and look for opportunities for moonlighting or spousal income.

    A 401(k) loan might make some sense. You can only access half of the balance, and you must pay it back within five years, which should be no problem.





    • #3
      Typically 401(k) loans are conditioned on being employed by that employer.  If you don't work there any more, the 401(k) loan comes due in full immediately.

      Avoid credit card debt at all costs.  Don't cash out the 401(k).

      Congratulations on getting into a great fellowship.  While your top priority should be fellowship training, you might be able to moonlight one night a week or 1-2 weekends per month.  Likewise, your kids already are going to preschool.  Your spouse could work even part time and make enough to avoid tapping the 401(k).  Between you and the spouse, you may be able to capture any match at your employer(s) and perhaps max out your Roth IRAs.  Heck, your spouse could look into working at the kids' preschool for free or reduced tuition and additional income.

      Drop the cable (keep internet access), shop around for cheaper auto and homeowners / renters insurance, and otherwise tighten things up enough to contribute to retirement savings, not draw from them prematurely.


      • #4
        Agree with @Hank - no 401k loans if you're about to leave that employer. If you really, really need to cash half of it, I'm not going to be too hard on you. Just look at it as if you've saved $20k in retirement so far, which is not so unusual for a new attending. I'm not going to pretend that it's a wise decision, but it probably won't be the worst decision you'll ever make.

        Please consider fee-only financial planning, even just for a checkup. This is a critical stage of your career to start out on the right track and get to a place where you're comfortable you're making great spending and saving decisions. I'm sure you don't want find yourself backed into a corner like this again.
        Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


        • #5
          why not take a little credit card debt on?

          i presume fellowship is for one year?

          i know it doesn't feel good, but i think the penalty is fairly stiff for early removal from 401k?

          you could get a low interest card and pay back with your signing bonus in like 8 months.  less if you sign earlier.

          if you know where you want to go work, and it is a hospital employed position, i'm sure they will even stipend you during your fellowship.

          we do that all the time.



          • #6
            There are plenty of 0% APR credit cards out there.  Those can be 0% interest on purchases for the first 15-21 months.  Citi Simplicity is one that I have used.  Its 21 months of no interest.  That seems smarter to me than throwing away so much of your 401k.
            I don't understand why cash flow is going to be any more difficult for you next year then it was this year during residency?  Were you somehow making more than 75k a year as a resident?  Although your living expenses on that salary are high, what have you been doing up until this point to pay for them?  How much are you spending on housing, pre-school, etc?


            • #7
              75k sounds pretty good for a fellowship.  Like hightower I am curious what has changed?  Are you having to move to a higher COL area?

              Obviously most on here aren't going to tell you to cash out your 301k.  But based on your username you could probably make a lot of mistakes with your future income..


              • #8
                I will probably make exactly as much money as I did during chief resident year. Cost of living is exactly the same and we are living pay-check to pay-check. With student loans coming due, even with IRB payments, the cost will definitely tip us over into a monthly debt burden. We could certainly make some minor cuts, but big ticket items (ie: kids education, insurance, etc.) make up the bulk of the expenses and these minor cuts wouldn't offset the student loan issue. I drive a 10 year old Corolla and my wife has a RAV4 that we still owe on. Other than that we try to live as frugally as possible.

                The biggest problem is access to cash flow.

                Based on advice, we will try to not tap into the 401k at this time.


                • #9
                  Agree with leaving 401k alone. And definitely look into 0% credit cards as a short term interest free loan if needed.

                  My question - how much is kids preschool tuition and how old are they? Without getting too "political", I have three teens and one went to preschool and two stayed at home with my wife.  There was zero difference in how they performed in school in kindergarten and the younger grades as they all went to the same grade school. In fact, now in high school, the two that stayed home with my wife are by far the better students (could be just coincidence). But if it is a drag on cash flow on you are doing it for "educational" reasons, I might advise dropping preschool. Of course if you both work, then preschool might be necessary, although maybe there are cheaper options?


                  • #10
                    sorry you have to worry about these issues while in training.

                    just take out the credit cards.  focus on completing your training.  in a few months you will receive a huge signing bonus that will wipe out the credit cards and allow for down payment on a house or significant reduction in loans.

                    the good news is in about 3 years, these concerns will be a distant memory.  in 10 years, you will have all new and different financial concerns surrounding ways to optimally invest all your money.  



                    • #11
                      Don't take this the wrong way, but I am also curious; if your wife doesn't work, and doesn't stay at home with the kids during the day, what does she do?


                      • #12
                        Husband and I were in a similar situation two years ago when he did a fellowship.  I stopped working since we moved for the fellowship and had a second child once we got there.   We lost one income, went to fellowship income (was less than 75k), added a child, and moved to super high income area.   You can do this without going further into debt!  Things were tight (and we went without a lot of things) but you can do it.  I am surprised at the number of "credit card as the solution" responses...  Some ideas:

                        If IBR is the thing sending you over, can you not forebear the loans for one year?  They will accrue interest (which you can pay later) but you won't have to make any of the payments.  We looked at this option but could just barely pay the IBR so we did that.  I would suggest this option over credit cards because they could just lend to needless spending - eating out, trips, new clothes, activities, etc etc etc...

                        We chose to delay preschool for then 2/3 year old.  This of course depends on your child ages etc and your spouses work situation.  My son started preK this year when we moved into attending position and he has done fine.  We did "homeschool" preschool for when he was 2 and 3.  We lived in an area with many activities - library, museum etc and that was very helpful to get "free" preschool social interaction.  We went without any paid activities (lessons, etc).

                        Depending on age etc of car - you could sell the car.  Get an older car and get rid of car payments.  Or go with one vehicle.  We were able to go with one vehicle due to work location etc but this may not be possible in all areas.

                        dont rely on a signing bonus as suggested above - may or may not happen.

                        Again - you can do this!  but please don't rob your future self - 401k or credit cards...



                        • #13
                          the guy is a neurosurgeon with a 1 year cash flow problem.

                          he's a responsible saver.

                          trying to economize $10k of expenses for one year may not be worth a lot of struggle.





                          • #14
                            As others have mentioned, if preschool is a significant monthly cost and your wife stays home, I would strongly consider having her do "homeschool" preschool. We have 3 kids and did not do formal preschool for any of them. Our oldest is finishing first grade and has excelled at school. The others haven't started school yet, but do well socially with new kids and seem perfectly on track with whatever "academics" they might be learning at preschool.

                            When we made the decision to not do a formal preschool program, the alternative has been daily social activities such as gymnastics, swimming, library story times, playground playdates, open gyms, art class, etc. This way they are learning social skills with new kids and also have other adults that they learn they need to listen to and follow the rules.

                            One huge benefit that I have found is that they are so close as siblings. This is the only chance they will likely get to have so much free play time together. Right now it's our 5 year old and 2 year old at home and their relationship is really special. It almost makes me want to homeschool at some point

                            I know this was probably a longer reply to a question you didn't really ask, but as you can probably tell, we have thought a lot about this and I really doubted our decision at first! Looking back though, it was the right one for sure.