Should I cash out my 401k?

[LadyM]

Yes, we're reevaluating everything.  The cell phone amount is actually AFTER the $60 reimbursement...so it's far worse than you thought!  Some of that is for the microcell we have, which gives us 5 bars of coverage in our house plus unlimited calling from home (we had to get it because cell phone coverage is sooooo bad out here that we'd be hard pressed to even make a single call without it).  I think that adds $25 a month or so, but cheaper than a landline.

But yes, I know we can do better.  So we'll be looking into it.  We're under contract, so I'm not sure when we can change carriers, but we'll see.

Sorry, I just started catching up...

DEFINITELY WORK ON THIS!!!  Start here:  http://www.mrmoneymustache.com/forum/share-your-badassity/communications-tech-isps-voip-cell/

And WTF is a "microcell"???  If you don't have home phone, but have shitty cell coverage at home, AND you have HIGH SPEED INTERNET - WHY NOT GO VOIP FOR THE HOME PHONE?!!?  Microcell might be cheaper than an honest-to-got POTS landline, but it's not cheaper than VOIP options.

Buy a NetTalk DUO and pay $2.50/month ($30/year) for home phone?!?  ($50 for the first year because it includes buying the device, so that's $4.16/month...but after that $30/year)  BOOM! - you have home phone AND you can drop the microcell, whatever that is.  BOOM! - You can buy the NetTalk device for less than 1 month's cost of Microcell and I just saved you $22.50/month!!  Add that to your stash and thank me later.

Call your cell provider and find out what it costs to get out of your contract....it might be worth it.  For us, we were already out of a contract: Our family plan with AT&T was at the cheapest (WITH the schoolteacher discount) was $81 a month for 2 phones with unlimited talk and text.  We switched to pre-paid with AT&T and got it down to $25/month for each phone (my husband and I) for 250 mins talk, unlimited text.

RECENTLY we switched to Airvoice Wireless (an AT&T MVNO) and now pay $10/month for each phone....for 250 minutes of talk OR 500 texts, or any combo of those two ($.04/min talk, $.02/text).  You can trim your cell bill too.

DO IT.  DO IT NOW!!!

[Jack]

And WTF is a "microcell"???  If you don't have home phone, but have shitty cell coverage at home, AND you have HIGH SPEED INTERNET - WHY NOT GO VOIP FOR THE HOME PHONE?!!?  Microcell might be cheaper than an honest-to-got POTS landline, but it's not cheaper than VOIP options.

Buy a NetTalk DUO and pay $2.50/month ($30/year) for home phone?!?  ($50 for the first year because it includes buying the device, so that's $4.16/month...but after that $30/year)  BOOM! - you have home phone AND you can drop the microcell, whatever that is.  BOOM! - You can buy the NetTalk device for less than 1 month's cost of Microcell and I just saved you $22.50/month!!  Add that to your stash and thank me later.

You can do even better than that: sign up for Google Voice and get an ObiTalk device (for $40 or so, I think) and pay zero per month for VoIP.

RECENTLY we switched to Airvoice Wireless (an AT&T MVNO) and now pay $10/month for each phone....for 250 minutes of talk OR 500 texts, or any combo of those two ($.04/min talk, $.02/text).  You can trim your cell bill too.

DO IT.  DO IT NOW!!!

That's a better suggestion than mine, unless one insists on keeping their wussypants smartphone data. (For what it's worth, my $40/month gets subsidized by my employer, so there's no advantage to me for reducing it further.)

[SpendyMcSpend]

You are looking at *very* short-term solutions that will do nothing for your long-term fiscal health.  What happens when the 401k money runs out??  You say that you two are planning to stay in your current jobs, so your income amount will not change.  You say that you are at bare minimum on expenses (which is not true), so that won't change either.  So basically, once the 401k money runs out you will be in EXACTLY the same position you are in now, only without retirement savings.  NOT A GOOD PLAN.

[SpendyMcSpend]

One thing I wonder is why so many wouldn't cash in this very tiny 401k to pay off high interest debt?  If I paid that debt over the course of the next 3 years, I'd end up paying as much in interest (or more) than the 10% penalty for taking the distro (taxes aren't really relevant since I'm in a better tax position now than I might ever be since my income is non-taxable and we have many business writeoff's thanks to being an independent contractor and having livestock).

Because cashing out your 401k does not change your unfrugal behavior.

[arebelspy]

One thing I wonder is why so many wouldn't cash in this very tiny 401k to pay off high interest debt?  If I paid that debt over the course of the next 3 years, I'd end up paying as much in interest (or more) than the 10% penalty for taking the distro (taxes aren't really relevant since I'm in a better tax position now than I might ever be since my income is non-taxable and we have many business writeoff's thanks to being an independent contractor and having livestock).

Because cashing out your 401k does not change your unfrugal behavior.

Too late.  Looks like SJ took the easy way out, paid the penalties and cashed it in.

Hopefully he/she sticks around and learns some frugal behavior so he/she doesn't fall into the same trap.

[SJ]

One thing I wonder is why so many wouldn't cash in this very tiny 401k to pay off high interest debt?  If I paid that debt over the course of the next 3 years, I'd end up paying as much in interest (or more) than the 10% penalty for taking the distro (taxes aren't really relevant since I'm in a better tax position now than I might ever be since my income is non-taxable and we have many business writeoff's thanks to being an independent contractor and having livestock).

Because cashing out your 401k does not change your unfrugal behavior.

Too late.  Looks like SJ took the easy way out, paid the penalties and cashed it in.

Hopefully he/she sticks around and learns some frugal behavior so he/she doesn't fall into the same trap.

I read the MM blog in its entirety once, as well as all of the comments.  Then I read it again with my wife (no comments this time).  So yeah, I know a fair amount about being mustachian.  This move, for many reasons, was the right one for our situation.  Sure, not totally superbadassmustachian, but it was what we needed at this time and WELL worth the small penalty we paid (about $2k, which we'll make up in interest saved from all the high interest debt we paid off).

[SJ]

You are looking at *very* short-term solutions that will do nothing for your long-term fiscal health.  What happens when the 401k money runs out??  You say that you two are planning to stay in your current jobs, so your income amount will not change.  You say that you are at bare minimum on expenses (which is not true), so that won't change either.  So basically, once the 401k money runs out you will be in EXACTLY the same position you are in now, only without retirement savings.  NOT A GOOD PLAN.

Umm...no, see we'll be in an entirely different situation because we'll have 1) paid off ALL of our high interest consumer debt (all that's remaining is our mortgage) and 2) will have refinanced our mortgage for additional savings, and 3) will now be able to sock $1k/month away, which is about 5x's what we were able to do before.

[arebelspy]

Cool.

In the grand scheme of things, 2k isn't much at all.  I think it was a mistake, but I've blown many multiples of that on bad decisions, so I'm not one to judge.

Best of luck to you.

[nealashley]

SJ,

As a CPA, I've seen this scenario play out a lot with various clients. I can tell you the one thing they all seem to be surprised about, even after my telling them and advising against it, is the tax liability following the withdrawal year.

The distribution, of course, will incur a 10% penalty and the entire amount will be added to your taxable income in that year as well. Based on your income, it looks like the distribution will be taxed at a marginal tax rate of 25% for Federal and probably 5-7% for State (depending on where you live) for a total of 40-42% of the amount going to taxes. If you can get stay under the  25% bracket, you will be looking at a total of 30-32% (in the 15% bracket). So, please keep this in the back of your head as I've seen it come back and catch people way off guard.

This post is to make you aware so you can plan accordingly.

To a kick A$$ future,

Neal

[lhamo]

SJ,

One suggestion that no one seems to have mentioned yet, so I'll throw it out there.  Several airlines have affiliated credit cards that have large miles bonus offers for opening the card.  I regularly get offers from both United and Delta for cards that have the fees waived for the first year, plust anywhere from 20-50k in mileage bonuses.  Depending on the ages of your kids (some mileage programs may not allow kids to travel unaccompanied, but a 12 year old is sometimes considered an "adult" who can be the companion for a younger child), you might be able to greatly reduce your expenses for your kids visits by getting one of these cards and using the bonus miles to book one or maybe both of the tickets.  Since you probably know the school calendar well in advance, you could book these well in advance to ensure you have seats. 

If you are committed to working from a budget and not living beyond your means, you could also use one of these cards for as many of your regular expenses as possible (gas, groceries, food, phones, utilities, etc) in order to accumulate additional miles that could be used toward the kids tickets.  Obviously very important that you track your spending and ensure that you pay off the bill in full every month.  But if you are disciplined and careful then this is another way to use your spending in one area to bring down spending in another over time.

Regarding your livestock business, if you don't already you should determine some baselines for how much you are going to invest and when you will cut your losses if you fail to make it profitable. 

Being in a rural area makes it difficult, but since picking up a regular second job is not feasible given your work situation you might also think about other possible part-time sidelines that might help bring in extra income that are more flexible, so that if/when you don't have paid work for your client you have something else to do that can at least bring in a little extra.  garage sale/thrift store combing for items that you can become an expert in appraising and then sell on ebay or craigslist might be an option -- I'm thinking things like farm equipment, furniture, antiques, out of print books, etc.  Difficult in a rural area, but might be a useful niche to explore.

Finally, assume you have already looked at whether or not there are generic versions of your meds that would be cheaper, but if not definitely do that.  And do some research about when the patents for your meds will run out, if there are currently no generics.  It would be wise to switch to the generic as soon as possible after it becomes available, as it appears your meds are very expensive.  If they are related to any chronic condition that can be addressed by changes in diet and exercise (e.g. high blood pressure, cholesteral, diabetes (maybe not severe cases, but if early you might be able to turn things around)), then some time spent on researching effects of diet on such conditions and doing some experimentation with changing yours might be well spent, and might also help to bring the grocery bill down. 

Personally I would not have cashed in the 401k -- I think you will find at tax time that the hit is much larger than you anticipated.  I hope you are saving up for your taxes in the event that happens.  But glad you feel good about your choice and are moving forward.  Hope you keep coming back here in spite of the tough love you got.  MMM and the crew really only want you to turn this around so that you can live a life not ruled by debt.

[SJ]

SJ,

As a CPA, I've seen this scenario play out a lot with various clients. I can tell you the one thing they all seem to be surprised about, even after my telling them and advising against it, is the tax liability following the withdrawal year.

The distribution, of course, will incur a 10% penalty and the entire amount will be added to your taxable income in that year as well. Based on your income, it looks like the distribution will be taxed at a marginal tax rate of 25% for Federal and probably 5-7% for State (depending on where you live) for a total of 40-42% of the amount going to taxes. If you can get stay under the  25% bracket, you will be looking at a total of 30-32% (in the 15% bracket). So, please keep this in the back of your head as I've seen it come back and catch people way off guard.

This post is to make you aware so you can plan accordingly.

To a kick A$$ future,

Neal

Thanks Neal.  All of this has been considered.  One reason I chose to do it now is because we're in the 15% tax bracket, thanks to my income being non-taxable on either state or federal levels.  I had them withhold a total of 25% to cover both the penalty and the federal tax liability.  I expect to get much of that back though because I am in independent contractor with attendant deductions, and we also run a livestock business with its own deductions.  So this year, we should basically be getting almost all federal taxes paid back as a refund.

[SJ]

SJ,

One suggestion that no one seems to have mentioned yet, so I'll throw it out there.  Several airlines have affiliated credit cards that have large miles bonus offers for opening the card.  I regularly get offers from both United and Delta for cards that have the fees waived for the first year, plust anywhere from 20-50k in mileage bonuses.  Depending on the ages of your kids (some mileage programs may not allow kids to travel unaccompanied, but a 12 year old is sometimes considered an "adult" who can be the companion for a younger child), you might be able to greatly reduce your expenses for your kids visits by getting one of these cards and using the bonus miles to book one or maybe both of the tickets.  Since you probably know the school calendar well in advance, you could book these well in advance to ensure you have seats.

If you are committed to working from a budget and not living beyond your means, you could also use one of these cards for as many of your regular expenses as possible (gas, groceries, food, phones, utilities, etc) in order to accumulate additional miles that could be used toward the kids tickets.  Obviously very important that you track your spending and ensure that you pay off the bill in full every month.  But if you are disciplined and careful then this is another way to use your spending in one area to bring down spending in another over time.

We currently have a rewards card and airline tickets are one of the rewards we can exchange for.  This card currently gives us double the points for the first year, which ends in a month, so we'll be shopping around to see if there are better points cards to go with.

Regarding your livestock business, if you don't already you should determine some baselines for how much you are going to invest and when you will cut your losses if you fail to make it profitable. 

Already done this.  We're not investing any further beyond feed, care some shows, etc. until we start turning a profit (i.e no further animal purchases...we'll work from our own breedings for the near future).

Being in a rural area makes it difficult, but since picking up a regular second job is not feasible given your work situation you might also think about other possible part-time sidelines that might help bring in extra income that are more flexible, so that if/when you don't have paid work for your client you have something else to do that can at least bring in a little extra.  garage sale/thrift store combing for items that you can become an expert in appraising and then sell on ebay or craigslist might be an option -- I'm thinking things like farm equipment, furniture, antiques, out of print books, etc.  Difficult in a rural area, but might be a useful niche to explore.

Yes, we're working on coming up with workable means of additional income.  Reselling on eBay/Craigslist are ideas I'm researching to see if I can find us a profitable niche.

Finally, assume you have already looked at whether or not there are generic versions of your meds that would be cheaper, but if not definitely do that.  And do some research about when the patents for your meds will run out, if there are currently no generics.  It would be wise to switch to the generic as soon as possible after it becomes available, as it appears your meds are very expensive.  If they are related to any chronic condition that can be addressed by changes in diet and exercise (e.g. high blood pressure, cholesteral, diabetes (maybe not severe cases, but if early you might be able to turn things around)), then some time spent on researching effects of diet on such conditions and doing some experimentation with changing yours might be well spent, and might also help to bring the grocery bill down.

My meds are currently generic and the cheapest options I can find, though I'm always looking out for possible ways to reduce this expense.  Some lifestyle changes have been made which help, but unfortunately this condition is not caused by diet, lack of exercise, etc. and not much can be done to improve the situation beyond medicine management.

Personally I would not have cashed in the 401k -- I think you will find at tax time that the hit is much larger than you anticipated.  I hope you are saving up for your taxes in the event that happens.  But glad you feel good about your choice and are moving forward.  Hope you keep coming back here in spite of the tough love you got.  MMM and the crew really only want you to turn this around so that you can live a life not ruled by debt.

Thanks for your kind words!  I haven't taken any of this personally, I knew what I was asking would get me some face punches, some of which are well deserved. 

[arebelspy]

I haven't taken any of this personally, I knew what I was asking would get me some face punches, some of which are well deserved.

I appreciate your attitude.  Most people would have left when not hearing what they wanted.

I'm glad you're making changes and moving forward, and I'm glad you're sticking around here as well.  Keep us updated on your progress.

[SJ]

I haven't taken any of this personally, I knew what I was asking would get me some face punches, some of which are well deserved.

I appreciate your attitude.  Most people would have left when not hearing what they wanted.

I'm glad you're making changes and moving forward, and I'm glad you're sticking around here as well.  Keep us updated on your progress.

And I appreciate yours as well!  I'll for sure be sticking around.

[warped]

I'm coming in way late, but thought I'd add my 0.02 worth.

I had a history of getting credit card debt, then consolidating at better interest rates.

This helped out short term, but my problem was that we just kept running up things.

Finally, my wife and I spent a lot of time talking, and got on the same page.

We meet every month, go over the budget and the debt payoff (I print it up and do the work, because I like that stuff!)

After we got on the same page, I got a bunch of 0% balance transfer cards and did another round of consolidation.

This time, with a weekly cash budget and being on the same page, it's working out great!!

Point is, yeah, you took a shortcut to some degree, but it helped out, and if you use the lesson to keep going in the right direction, I think you'll be fine.

Random tip of the day: you can buy a 25 lb bag of rice for like $10. Do you have any idea how much rice that is????

Beans are also shockingly cheap in bulk. ;)

[SpendyMcSpend]

I think the tax liability will be more like 30-35% (future CPA here) when you include the state taxes.

[offroad]

Put it this way:

Would you think about going bankrupt first? Or cashing out 401k which is protected from bankruptcy?

All the debts go away for ten years. More money saved for FI. Just saying.

[grantmeaname]

We're kinda beating a dead horse now that SJ has cashed it out and made his decision. Maybe we could move on?

[offroad]

wow.  that was a fast cash out. one month later.   roll on.

[SJ]

I think the tax liability will be more like 30-35% (future CPA here) when you include the state taxes.

State taxes are like 6% or so, if I recall correctly.  So total liability would be about 30%, of which 25% is already covered.

[SJ]

Put it this way:

Would you think about going bankrupt first? Or cashing out 401k which is protected from bankruptcy?

All the debts go away for ten years. More money saved for FI. Just saying.

Wow, some of you really bow down to the 401k...lol.  No, I wouldn't consider bankruptcy when I can just cash it out and pay off all my debts.  Done deal, debts gone.

[Jack]

Wow, some of you really bow down to the 401k...lol.

That's because we understand the power of tax-advantaged compound interest.

[SJ]

Wow, some of you really bow down to the 401k...lol.

That's because we understand the power of tax-advantaged compound interest.

As do I...

But even so, tax-advantaged compound interest on $20k is hardly worth filing bankruptcy to keep.

[grantmeaname]

And interest on debt compounds just like interest on savings.