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5 Situations When Cashing Out 401K Is Worth The Penalty Risk

March 08, 2012 | Comments: 0 | Views: 126

1. Paying Off Past Due Mortgage Payments to Avoid Foreclosure - If you fall behind on your mortgage payments, you could end up facing foreclosure. Cashing out 401k accounts to bring your payments current or even pay off your mortgage completely may be a good idea. This step can save your home and also help you save money. If your mortgage interest is higher than the returns you are receiving on the 401k fund balance this may make good financial sense and be a better way to use this capital.

2. Medical Bills Not Covered By Insurance - If you find yourself swamped with medical bills because of an unexpected illness or disease then any insurance coverage that you have may not be enough. Unpaid medical bills can have a negative impact on your credit report and credit score, which means higher interest charges in the future. Withdrawing the amount needed to cover any outstanding medical bills can eliminate this debt and may not involve the tax penalty typically charged on early withdrawals. Once your medical bills are paid off you can focus on making account contributions towards your retirement once more.

3. College Education Costs - College education costs have skyrocketed in the last few decades, and one of the most common reasons for cashing out 401k accounts is to pay higher education costs for children. If you have a child or grandchild who is starting college then the expenses involved can seem overwhelming. While you should try to find the funds to cover this cost using other methods first it is normally possible to use your 401k balance as a last resort. Sometimes this is the only way available for you to get the money needed to cover the cost of college and the 10% tax penalty for early withdrawals may be waived if the entire amount withdrawn is used for college expenses.

4. Making A Down Payment On A First Home - Cashing out 401k account balances in this case can be done, too, but not advised because these are funds you need to grow and provide financial help after you retire. If you want to buy your first home it may be possible to get the needed down payment from this type of account though, and in some cases this can be the best solution. The higher your down payment amount is the less interest and additional expenses you will have to pay on the home. If you provide at least 20% down then mortgage insurance will not typically be required and this can be a big annual expense you can save.

5. When Employment Circumstances Change - If you switch employers then cashing out 401k account balances can be a good idea if the funds are simply rolled over or invested into a qualified IRA within the time limit specified. If these steps are followed then your actions will not incur any tax penalty or additional fees, but if you do not roll over or transfer the funds within the time line allowed these costs will usually be charged by the IRS.

Curtis L Horn is one of the article authors on investment related website Investment Advisor Tips

Source: EzineArticles
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