When Does It Make Sense to Cash Out a 401k Rollover to Purchase Debt?

Is the debt keeping you from earning your mortgage payments or saving money to buy your home? If that’s the case, you might be wondering if you should forgo your chance to roll over your 401k savings to another retirement accounts so you can use this cash to pay off your debt. While this can seem like an easy enough answer to your financial problems, you should carefully consider all your options.


Employers offering 401k plans give their eligible employees an opportunity to determine how much of the pre-tax earnings they want to contribute to their 401k accounts. These contributions aren’t taxed unless a worker decides to withdraw them until the age of 59 1/2. Employees who are under the age of 59 1/2 and changing employers or have lost their tasks must maintain their 401k savings under their present policy or roll over their cash to another employer’s plan or to an Individual Retirement Account (IRA) to prevent the 20 percent tax withholding and 10 percent early-distribution penalty. However, under certain conditions, employees can cash out their 401k savings and avoid the early-distribution penalty.


A few 401k plan sponsors make it possible for employees to ask a hardship distribution if they have an immediate and heavy financial need, for example mortgage or medical debt. With a hardship distribution, a worker can withdraw his 401k donations to defray medical expenses or pay his mortgage debt when he is facing foreclosure. Remember that people must fulfill several requirements so as to meet the requirements for this type of distribution. Under IRS guidelines, employees must prove they have a financial need and no additional resources or assets that can be utilised to satisfy their fiscal obligations.

Time Frame

Employees who are close to retiring can withdraw their 401k money to pay their debt by taking what the IRS calls for a series of substantially equal periodic payments. According to the IRS, this type of distribution allows people to take money from the 401k accounts in substantially equal yearly payments over a period of a minimum of five years, or till they have reached the age of 59 1/2, without having to pay the early-distribution penalty.

Expert Insight

Financial expert David Bach, author of the”Finish Rich” book collection, advises against taking out money from a 401k program for any reason other than to purchase a home. Bach clarifies that people stand to lose most of their 401k savings by taking money from the account before retiring. Based on Bach, premature withdrawals are taxed up to 50 percent, such as a tax penalty and income taxes. Because of this, people are left with a lot less cash than what they originally had stored in their 401k accounts.


It can make more sense for employees to borrow from their 401k account to pay their debt compared to withdraw cash in their accounts. Most employees may borrow up to 50 percent of the 401k savings. In considering this option, borrowers should be aware of some of the benefits and disadvantages of 401k loans. The loans offer reasonable interest rates without any tax penalties, and all payments (including the interest) are deposited back in the strategy. But, 401k loans have to be paid in five years or when the worker leaves the company, otherwise the loan will be taxed as a historical distribution.

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