Need Insight on whether or not to withdraw from my 401K

[Guest frothdog]

I have a 401K through Merrill Lynch which was my last employers 401K provider. I currently have about $1400 in it and right now have a desire to withdraw the money and am willing to take the 20% fee hit (for withdrawing) and then the 10% tax hit which would leave me with around $1100. I will be using this money to iron out some debt and straighten a few things out.

I have a desire to continue to invest later in life, but would like to iron out debt so that I could invest more in the future. Basically, withdrawing my 401K would be allowing me to jump start on a money management program and iron a few things out.

What is your advice/insight?

Thanks

[david rigby]

You forgot taxes. The 10% is an excise tax for "early withdrawal", but the entire amount is also taxable.

20% withdrawal fee!!!! Wow. Seems like a lot to leave on the table. Does this amount decline over a few years? Should go to zero after a reasonable time.

Only you can answer the question of whether the net (after fees and taxes) will be worthwhile. Depending on your bracket and state taxes, you might have only about $800 left. Most readers of these Message Boards will suggest you leave it where it is.

[GBurns]

Are you sure that the "20% fee hit" is for withdrawing and not for the withholding of Federal income tax?

Have you tried negotiating the debt down or doing installment payments? This might be better than a lump sum payment, especially if the lump sum is going to cost you so much to get.

You used the term "money management program". Is this something that is being sold to you as part of an alleged Debt Management plan?

[mbozek]

I am assuming that the 20% withdrawal fee refers to the 20% tax witholding that would apply and not to any back end load charge for the withdrawal which would be imposed by the fund provider. If your total income for 05 is about 36k or less you will be in the 15% bracket and will have to pay 10% penalty tax for a total tax of $350. This means that you will have $1050 left (before state income tax) which will be good if it gets you out of debt and saves interest charges.

[Tom Poje]

the real answer depends on your discipline.

'to pay off debt' - yes, $1000 toward a credit card that you are paying 18% interest on (or whatever) seems like a good deal. Unfortunately, many people pay off the debt, and then take on a new debt, so they have not accomplished anything.

'invest more in the future', again this goes with discipline. I know too many people for whom this day never comes. there is always the new boat or new pickup truck that comes first.

(I also know one individual that is very good at saving money, so it can be done.)

again, it boils down to discipline and commitment.