New Castle News

Money: Dave Ramsey

November 30, 2012

Dave Ramsey: Why you shouldn’t cash out on your 401(k)

NEW CASTLE — Dear Dave: Is it a good idea for a married couple in their early thirties, who have a lot of student loan debt, to cash out one of their 401(k)s to pay it off? Marcy

Dear Marcy: No way. You never cash out a 401(k) or IRA to pay off debt, unless it’s to avoid a foreclosure or bankruptcy. Let’s say you take $50,000 out of your 401(k). Do you know what happens next? They’re going to charge you a 10 percent penalty, plus your tax rate. If you make $75,000 a year, that puts you in a 25 percent tax rate, plus the penalty. That’s a 35 percent hit, and that’s how much of your money is going straight down the toilet. Look at it this way. You wouldn’t ask me if it’s OK to borrow money at a 35 percent interest rate to pay off your school loans, right? That would be ridiculous, and this is just as dumb. There are no shortcuts when it comes to getting out of debt, Marcy. Roll up your sleeves and get on a beans and rice budget where every dollar has a name. This will enable you to save money and pay off that debt. — Dave

Dear Dave: My wife and I have our fully funded emergency fund in place, and we’re debt-free, except for the house. She wants to return to school to get a master’s degree and change careers. She’ll be reimbursed up to $7,000 a year. Can we use some of our emergency fund to get things started? — Kevin

Dear Kevin: I’ve got a better idea. Save up the money. You guys are in great shape already. And to me, this opportunity seems like a small investment with a fabulous return. I really like the idea. But you have to be careful when it comes to things like this. You don’t want to get into the habit of calling things emergencies when they’re not emergencies. It’s a great thing, but it’s nowhere near an emergency. I know she’s excited about the possibilities, but I’d just roll up my sleeves, save a little extra for a while and cash flow the classes. She’ll probably get reimbursed for the first classes right after she gets her grades, then you can use the reimbursement check to pay for the next classes, and the next check the next classes. Make sense? I love the school idea, and I’m glad your wife has such a great opportunity. But I don’t want you to take a chance on messing up the progress you’ve made in taking control of your finances. Just take your time and save for those first classes. You’ll be glad you did. — Dave

(Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.)

 

1
Text Only | Photo Reprints
Money: Dave Ramsey
  • Ramsey.jpg Dave Says: Keep your hands off the 529
    “Dave Says” is a weekly column featuring financial advice from nationally syndicated radio host Dave Ramsey. His column is filled with timely, relevant questions and answers taken from actual letters and calls on Ramsey’s radio progam, “The Dave Ramsey Show.”

    July 25, 2014 1 Photo

  • Ramsey.jpg Dave Says: Don’t leave an estate with life insurance

    “Dave Says” is a weekly column featuring financial advice from nationally syndicated radio host Dave Ramsey. His column is filled with timely, relevant questions and answers taken from actual letters and calls on Ramsey’s radio progam, “The Dave Ramsey Show.”
     

    July 18, 2014 1 Photo

  • Ramsey.jpg Dave Says: Playing with house money 

    “Dave Says” is a weekly column featuring financial advice from nationally syndicated radio host Dave Ramsey. His column is filled with timely, relevant questions and answers taken from actual letters and calls on Ramsey’s radio progam, “The Dave Ramsey Show.”
     

    July 11, 2014 1 Photo

  • Ramsey.jpg Dave Says: Contentment is a state of being

    “Dave Says” is a weekly column featuring financial advice from nationally syndicated radio host Dave Ramsey. His column is filled with timely, relevant questions and answers taken from actual letters and calls on Ramsey’s radio progam, “The Dave Ramsey Show.”
     

    July 4, 2014 1 Photo

  • Ramsey.jpg Dave Says: Housing payment ratio includes taxes and insurance

    “Dave Says” is a weekly column featuring financial advice from nationally syndicated radio host Dave Ramsey. His column is filled with timely, relevant questions and answers taken from actual letters and calls on Ramsey’s radio progam, “The Dave Ramsey Show.”
     

    June 27, 2014 1 Photo

  • Ramsey.jpg Dave Says: What’s the better bargain: new or used?

    “Dave Says” is a weekly column featuring financial advice from nationally syndicated radio host Dave Ramsey. His column is filled with timely, relevant questions and answers taken from actual letters and calls on Ramsey’s radio progam, “The Dave Ramsey Show.”
     

    June 20, 2014 1 Photo

  • Ramsey.jpg Dave Says: Let go of the timeshares

    “Dave Says” is a weekly column featuring financial advice from nationally syndicated radio host Dave Ramsey. His column is filled with timely, relevant questions and answers taken from actual letters and calls on Ramsey’s radio progam, “The Dave Ramsey Show.”
     

    June 13, 2014 1 Photo

  • Ramsey.jpg Dave Says: Changing jobs? Roll the money

    “Dave Says” is a weekly column featuring financial advice from nationally syndicated radio host Dave Ramsey. His column is filled with timely, relevant questions and answers taken from actual letters and calls on Ramsey’s radio progam, “The Dave Ramsey Show.”
     

    June 6, 2014 1 Photo

  • Ramsey.jpg Dave Says: Millionaire widow needs a prenup

    Dave Says” is a weekly column featuring financial advice from nationally syndicated radio host Dave Ramsey. His column is filled with timely, relevant questions and answers taken from actual letters and calls on Ramsey’s radio progam, “The Dave Ramsey Show.”
     

    May 30, 2014 1 Photo

  • Ramsey.jpg Dave Says: Funding fun after college

    “Dave Says” is a weekly column featuring financial advice from nationally syndicated radio host Dave Ramsey. His column is filled with timely, relevant questions and answers taken from actual letters and calls on Ramsey’s radio progam, “The Dave Ramsey Show.”
     

    May 23, 2014 1 Photo

House Ads
Poll

Would you want to know what your pet is thinking about you?

Yes! I'd love to know what my pet is thinking.
Nah, it's probably not that interesting.
I don't know. I'm afraid of what I might find out.
     View Results