Withdraw from 401k to lower expenses and debt? Long!

Hi, I hope someone can help me sort this out. I posted some time ago and got a lot of good encouragement!

The bottom line is, we barely make enough money to cover our expenses. Any house repairs, car repairs, etc. are a huge ordeal. I’m trying to get on track by establishing a separate savings account into which we can deposit a little each month to cover big expenses like car repairs, but we have so little extra to do this.

So one idea I am tossing around is to take a chunk out of the 401k from my husband’s old job to pay off some of our secured and unsecured debt.

We currently have $67k in the 401k; that’s the only savings we have.

We have two cars that we’re paying off; on one we owe $5k, the other is $10k. Selling them off might barely get us what we owe, so that wouldn’t work, as we wouldn’t be able to buy replacement cars. We do need the two cars. The car payments total $723/month.

We owe Discover card $5k which we are paying at $200/month.

We have a debt of $12k to our children’s private school which we are paying off at $400/month.

The total of these debts is $32k. The total monthly payments on all this is $1,333.

The way I see it, if we withdraw $32k plus another $4k to pay the penalties and taxes, we would be able to put about $800/month into long-term savings and CDs or retirement accounts, and have another $500 to cover our monthly expenses including big-ticket items.

Does this make sense, or am I treading into dangerous ground here? The 401k is currently earning about 4%+.

I’d really appreciate a reality check. Thanks a lot!

I think you should rethink making a 401k withdrawl. You’re taking a huge opportunity cost of what the money could become if you left it invested. I’m concerned that you’re only making a 4% return….there must be more investment options than the rate you’re getting which sound like a guaranteed account.

Please don’t take offense at my honesty because I’d rather tell the truth than try to pacify you. Though I have limited information, it appears that you have some “lifestyle” issues, e.g., private school. Proper education for children is a high priority for any good parent but at what expense?

A 401k withdrawl seems to be a quick fix for you. Have you examined how you ended up in debt?

It may be a little painful but why not make a family game out of additional ways that you can cut expenses. If you’ve cut back all you can and you’re still barely making it, you need to go after the dollars and downsize. For some, this means moving to a smaller home, etc. Americans are infected with an inability to delay gratification – we try to acquire the things in our 30s or 40s that it took our parents 30 years to acquire.

Food for thought…