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Life happens. No matter how much we plan and try to control events, things sometimes spiral out of control. And to control the damages or the effects, you often need to turn to sources you never would have considered before.

Most people would prefer to leave their retirement funds until they retire. But when there is an emergency and the only option left is to cash out your 401k, what do you do? Should you cash it or not? Quite a few young working adults make this really terrible mistake for things that aren’t such a big emergency. Before you make up your mind on whether to cash it or not, there are some things you need to know:

….the government imposes a 10 percent penalty on any withdrawals before age 59½. Some early distributions qualify for a waiver of that penalty, for instance hardships, higher education expenses and buying a first home. – Bankrate.com

Goodfinancialcents.com defines the hardship criteria as follows:

  • Un-reimbursed medical expenses for you, your spouse, or dependents
  • Toward the purchase of your principal residence
  • To prevent foreclosure or eviction from your principal residence
  • College tuition and related educational expenses for you, your spouse, or children
  • Funeral expenses
  • Certain expenses for the repair of damage to your principal residenceGoodfinancialcents.com

So you’d really need to consider whether or not your hardship meets the criteria for withdrawal.

Depending on your age and circumstances, you could consider paying off other debts with your 401k. For instance, if you’re 27, owing $30,000 in credit card debt and $30,000 in your 401k, you could consider it given the circumstances and the weight of the debt. After all, you still have a few decades to invest in your 401k account. Ultimately, it’s about a judgement call.  I wouldn’t recommend it.  You can continue to save for retirement or put it off while you pay down your debt depending on how deep your debt is right now.

These are just a few things you need to consider before making up your mind on whether you will or will not cash your 401k.

What Alternatives Do You Have?

Instead of emptying your 401k, consider these options instead:

  • Borrowing from or against an established 529 College Savings Plan
  • Secure a personal loan using the 401k as collateral
  • Find extra money in your budget

Also, consider selling some unnecessary things. Yes, it might seem unthinkable. But take a minute to consider how important some of the stuff you own are. Cut, trim and prune to the barest minimum.

For instance, drop the cable,  clean out the garage and list the items on eBay or other classified sites, sell some of those expensive designer suits. Get a second or part time job to make ends meet, get a new roomie, become more frugal and cut back on your expenses.

Bottom line, do all that is necessary and sincerely exhaust ALL options  before cashing out your 401k. Yes, it is not easy and it will probably hurt to let some of those things go. But doing this now, will help secure your future and give you a better life.

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