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I am single and have one income. I live in Denver and the rents have gotten crazy here. My rent is now the same as one out of my two bring-home paychecks in a month. I have great credit. I have 25K in credit card debt and 3 grand in medical debt because of cancer treatment. I do not know when the medical bills will stop due to this type of condition. I have been a federal employee for 18 years. I have a negative cash flow every month because I am suffocating trying to pay the minimum payments and everyone has their hand out.

I only have 88K in my 401k. I want to move to another state and buy a house there where the cost of living is not so high and get a fixed rate because the rents here increase 200 a month every renewal.

Trying to pay the credit cards off is no longer seeming possible because half my payments are interest. I am no longer using them, but they are not going down.

Because of my health condition, I would like to take a position in another state , closer to my family and that has a better cost of living than Colorado. I want to have a house built there. It takes 6 months. I am considering doing a hardship withdrawal for these reasons:

  1. I figure I will need 6 grand to have an extra 1k a month for 6 months in addition to my full-time income from my full time job just to pay minimum payments on all medical and credit card debts and living costs.
  2. 2 grand for moving across many states
  3. 1K to cover deposits, application to apply at apartment in the new state until the house is built
  4. 3K in earnest money to sign a contract on a house in new state
  5. 9K I borrowed from friends because my cash flow is negative
  6. $2900 to vacate my lease early - that is their penalty

I only bring home about 2800- 3000 a month. That is my net. I am on a special diet due to the health condition and take special vitamins, organic produce, etc.

I was fine and had no credit card debt until 5 years ago. Everything got very expensive, especially housing.

I would love to just take out a loan or even a residential loan from my 401K, but that would lower my income substantially to where I don't think I could pay a mortgage. I am 51 years old. Please don't ask me why I have not bought a house before now. I have always wanted to move to another state. Close to my family and less expensive and then I got into cc debt when houses and rents and medical expenses came along. I have a major cash flow problem. I have never been late for any payment at any time my entire life and all my good credit seems to have been for nothing - at my age.

  • Your 401 amounts are shielded from bankruptcy. Just putting it out there, in case you didn't know. – littleadv Nov 15 '15 at 9:27
  • Yes, I am aware of that, but I still need a place to live and you can't rent or buy anything with bankruptcy's bad credit. – Sherry B. Nov 15 '15 at 9:30
  • If anyone could help me with alternative ways than raiding my retirement and paying huge penalty and 25% tax bracket, I would be very grateful for the advice. – Sherry B. Nov 15 '15 at 9:40
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    Buying the house, and especially building a new one (do you already own the land?) - may not really be considered as "hardship". While I understand the desire, and in the long term it will probably be economically justified, in the short term - your primary goal should be reducing the cash outflow, i.e.: finding as cheap accommodation as possible. Buying, and especially building a house - is not the cheapest accommodation in the short term. – littleadv Nov 15 '15 at 13:46
  • In Denver, the rents are identical to mortgages. I am in a tiny 1 BR and I am paying more than all the people I work with who bought houses 10 years ago. Denver's housing situation changed about 2 years ago (law of supply and demand) and thousands are moving in every month. Builders are having trouble finding land. – Sherry B. Nov 15 '15 at 19:25
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Gaining traction is your first priority.

  • 25K credit card balance
  • 3K medical debt
  • 88K 401k

WARNING: as @JosephZambrano explains in his answer the tax penalty for withdrawing from a 401(k) can easily exceed the APR of the credit card making it a very bad strategy. Consult in-depth with a financial advisor to see before taking that path. As @JoeTaxpayer has noted a loan is another alternative.

The 401k is no good to you if you can't have shelter or comfort in the mean time. The idea is to look at all the money as a single thing and balance it together. There is no credit and retirement, just a single target that you can hit by moving the good money to clear the bad.

Consolidating the credit card debt somehow would be very wise if you can. Assuming it is 30% APR shrinking that quickly is the first priority.

You may be able to justify a hardship withdrawal to finance the reduction/consolidation of the credit card. It may be worth considering negotiating a closure arrangement with a reduced principal. Credit card companies can be quite open to this as it gets their money back.

You may also be able to negotiate a lower interest rate.

You may be able to negotiate a non-credit-affecting debt consolidation with a debt consolidator. They want to make money and a 25K loan to a person with sound credit is a pretty good bet.

Moving, buying a house, or any of that may just relocate the problem.

You may be able to withdraw $25K from your 401k under hardship, pay the credit card, and come up with a payment plan for the medical debt.

It's a retirement setback for sure, but retirement is an illusion with that credit card shark eating all of your hard-earned money. You gotta slay that beast quick.

Again, be sure to fully analyze whether the penalty on the 401(k) withdrawal exceeds the APR of the credit card.

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    Thank you so much. I am going to ponder over everything you said and see what I can do. I love it that you explained seeing it all as a single target. For sure, there is NO retirement nor rest with credit cards. Evil. Pure evil to get bound up. Worse than jail. Bondage is what it is. It must be slayed before it slays me even more than it already has. You have very good solutions. – Sherry B. Nov 16 '15 at 0:30
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    Alain, please see my answer as to why Sherry cannot take a hardship withdrawal (yet) – Joseph Zambrano Nov 17 '15 at 1:41
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    Anytime! I am a pension actuary so I have lots of hands on experience with it. Your game plan is spot on - kill the high APR debt first. – Joseph Zambrano Nov 17 '15 at 1:44
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    -1, sorry. Say she could take the withdrawal. 25% federal tax, say 5% for state, 10% penalty. A 40% hit, vs the loan Joseph suggests. This is a case where the loan might make sense as a stop gap measure. If she loses her job, she's no worse off for trying. – JoeTaxpayer Nov 17 '15 at 1:47
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    Yes. DV reversed. +1 – JoeTaxpayer Nov 17 '15 at 2:15
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With respect to the 401(k). Before taking a hardship withdrawal, one must first deplete the ability to take any 401(k) loans available. This is a regulation. The 401(k) loan limit is the lesser of $50k, 50% your vested balance, or $50k minus the highest loan balance within the last year. Here's the good news: it is not a taxable event; you can pay back over a maximum of 5 years; interest is low (usually 4.25% or so). The bad news: if you terminate employment then the loan balance must be repaid or else it becomes taxable income plus a 10% penalty. I suggest you consider eliminating the credit card debt via this option. Pay back as aggressively as possible and if/when you terminate you can take the 10% penalty - it will be far less of an impact than 25k accruing approximately 25% annually.

  • My head is spinning. I am so stressed out. May I say this: I desperately want to move to the south to be near my aging parents. They need me there. I love them and want to be near them at this time. This is extremely important to me. How do I find a financial advisor? Would a tax consultant be a horrible choice? Let me ask you about this option: What about my moving to the south and taking the hardship withdrawal because I have no cash to move and then buying a house in the south and then after closure, filing bankruptcy so I will be able to buy the house while my credit is good and be able to – Sherry B. Nov 17 '15 at 7:38
  • make the mortgage payments and have a house before I am too old. Your thoughts? I am totally desperate. – Sherry B. Nov 17 '15 at 7:39
  • I may have to live in the other state for a number of months to be eligible for bankruptcy. My medical bills keep increasing and I have not even started my radiation. I may not even get the radiation. It is 35 dollars every day for 33 days. I have an US this Wednesday and my copay is $100.00. I just looked at my lease and it demands 3 months of monthly rent if I break the lease. The lease is $1450 and I only receive 2 paychecks a month in the amount of $1500 net pay each. – Sherry B. Nov 17 '15 at 7:45
  • You see, without even skimming the top off the credit card debt, it would require: – Sherry B. Nov 17 '15 at 7:52
  • the $23,500. That is not including the penalty of 10% and the 25% tax burden. – Sherry B. Nov 17 '15 at 8:00

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