hardship withdrawal

Question

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.

Answer 1

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.

Answer 2

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.