Advice Requested - Cash out my 401K? Please Help. :(

[ayla17]

Thank you in advance for your opinions. My wife recently accepted a new position that pays her 30% less than her previous high stress, no flexibility job. I knew things were going to be tight, and I had thought I had figured out what our new budget would be but I was off. Here are the details of our monthly situation as a family with two small kids.

• Our Net Income: $8800
• Expenses: - $9000
  • This includes 2700 mortgage, 2000 daycare for both kids, 1000 car payments, 240 car insurance, 200 cell phones and internet, 140 affirm loan payments, 105 home warranty, 690 my Wife's TSP loan from previous job with the government, and $1400 in credit card payments. and a few other smaller things. This does NOT include day to day expenses like gas, food, clothes... etc.
    

Our total credit card debt is $51,000.

Our Retirement Accounts:

Wife's TSP: $153.802 (plus a loan that has $28,000 left on it)

My 401k: $61,300

Fidelity Rollover IRA: $48,238

Here are the few options I'm considering:

A) Getting into a nonprofit debt management program to consolidate our CC debt into one payment with a much lower interest rate. (8-10%) In doing so we close all credit cards except for 1. This would be the second time we have been in such a program.

B) Not paying the TSP loan and let it go default. But we would have a hefty Tax payment come next year right? We would be taxed on our remaining balance of 28,000

C) Cashing out my 401K to pretty much eliminate all CC debt. Dumb move in the long run, I get.

Bad decisions on our end, living outside our means for way too long. It caught up with us and now were F'd. Any advice is greatly appreciated. Thank you so so much in advance!

 

[lalaland777]

@ayla17 Hate to be the “tough guy” here but if this is your second time around with debt consolidation, you may have a “living beyond your means” problem. (Which you admit).

It’s time to truly reevaluate everything. Last thing to look at are the retirement assets as those are super expensive answers when you account for the penalties and taxes.

 

[ayla17]

@lalaland777 Thank you. I have been reevaluating everything these past few days. Believe me. Some hard truths for my wife and I.

 

[jane_doe]

@ayla17 Getting out of debt has to be your #1 priority. before you touch the 401K and take the penalty...

*Stop using the credit cards

*Sell one or both of the cars and buy a beater .

*Get a second job.

*Start listening to the Dave Ramsey podcast. I don't believe in everything he has to say but he has great advice on getting out of debt.

 

[ayla17]

@jane_doe Thank you.

 

[theadorus]

@ayla17 It may sound like a crazy long shot - but what if one of you stayed home with the kids during the week - and found a weekend, or evening / weekend job? The 2k for day care is a budget breaker, though you do have several budget breakers in play. (and this may make it possible to sell a car).

But it may help a little bit to take a step back and to think of your situation as a somewhat short term problem. In 2, 3 or maybe 4 years, you're daycare expenses should be significantly reduced, and IF you get some of your other spending under control, you may be in a position where you can start saving again.

Other than that, your option A is pretty much a necessity, and this is one of those times that calls for zero spending on anything that's not a very real necessity.

Re: the TSP loan, I don't know the rules, or how the penalty for defaulting compares to the 10% penalty, plus the taxes on funds withdrawn from your 401k. But imho you may have to pick the lessor of those 2 evils (or possibly making a TSP withdrawal to cover the loan?). But the kicker is that if you pull out additional money to pay credit card bills, how can you trust yourselves not to keep spending?

 

[jewish_inquirer]

@theadorus My in-laws did this. She worked night shifts and he worked days and they traded off with the kids so they never needed daycare. Obviously grueling and not ideal, but it helped them get a leg up in tough times.

Even if you both work, evening/weekend side hustles may be temporarily necessary to dig out of this.

 

[ella_inc]

@ayla17 First, you need to pull your monthly statements, at the start and end of a month or every paycheck or every two pay checks.
Sit down, look at what came in, and what went out.

Try to not go out to eat, dont smoke, vape, drugs, gamble, buy little phone gems etc. If you want to pull your life together, start with your spending habits, separate wants vs needs, you dont need that gas station energy drink or Starbucks coffee. This includes subscriptions, netflix, hulu, spotify, etc. cancel them until your debt is cleared.

Next, we dont want you out on the streets, food, shelter, electricity/heat, make sure basics are covered, save up your money so you have a minimum of 1 months of expenses covered should something bad happen.
This is your emergency fund, touch it only in an emergency, car breaks, lost your job, medical situation.

Then, if you have a 401k, still do the match, but dont go over the match, focus on your debt first.

Buy groceries, and meal prep to save money.

CC debt? Wipe that first, if you do have credit card debt, cut them up, and close them, dont even think about getting a credit card until your debt free.
Next on debt, wipe out the ones with highest interest first if, If they are all the same interest rate, do the minimum monthly payments on all of them except the smallest, wipe the smallest ones first, one at a time, this will build up your confidence overtime seeing your debt disappear, smallest to largest.

Once your debt is gone, create 6 month emergency fund, then save, invest, add to retirements, and enjoy life.

Also sell stuff you dont need to earn extra profit, old clothes or anything you can, if you can work OT, work it to clear debts faster, if you arent already.
This is a bit of a scorched earth method, but if you are serious, these are the steps to follow, you sacrifice now, so you can enjoy your life later.

Maybe you can ask family for a loan? For some of the CC debt.