Should I cash out my $250,000 401k to pay off my $130,000 mortgage and live debt-free or keep working in a stressful job?

As soon as most people hear that they may be on the cusp of being cut at their job, there is no question that a panic cycle sets in. I can say this confidently as I have worked in positions where job cuts have taken place, and a sweat-inducing panic starts as soon as any concerns pop up that your name may be on the chopping block. 

This is the exact scenario one Redditor is going through right now. They are worried about restructuring, which could lead to layoffs. While this hasn’t happened yet, they are trying to prepare for the worst, so they posted in r/DaveRamsey to get some advice on handling things. 

I completely empathize with this individual. It has to be difficult to be under stress at work and to know that it could be over at any minute, leaving you without a paycheck. 

The Situation 

The 40-year-old Redditor is under no delusion about what this restructuring may mean, and like most people, they have poured their heart and soul into this company. There have been family sacrifices and far too much stress that could all be gone on short notice. 

As a result of this potential job loss, they are starting to think about what comes next and how to shore up their finances in case they have to find a new role. Currently, they have $250,000 in a 401(k) and a mortgage of $130,000 at a 3.9% interest rate. 

One option the original poster is heavily considering is potentially pulling all of the money out of the 401(k) and paying off the mortgage and two outstanding car notes. The car notes are around $10,000 each, so you’re talking about paying off around $150,000 in outstanding debt. 

In the eyes of this Redditor, a debt-free life is equivalent to a stress-free life, so they are considering what pulling out of the 401(k) could mean in terms of penalties and rebuilding a retirement fund. 

Unfortunately, there is only around $10,000 in an emergency savings fund, which will be gone between the Redditor, his wife, and a 13-year-old child in a month or two. So, what does this Redditor do? 

What Not To Do

I wholeheartedly agree with some Redditors who don’t hold back on their opinions and say that cashing out of the 401(k) would be ridiculous. This plan is all out of whack, and after everything is said and done, there is likely to be a 10% penalty for pulling the money out of the 401(k), which then has to be declared as income, so a good chunk of this money, potentially as much as 33%, is gone before it goes to any debt. 

The bottom line is that this would be a huge mistake. No matter what, keeping this money growing will be the best long-term and short-term move, even if it’s painful in the interim. Unless this Redditor is going to face either bankruptcy or foreclosure, the 401(k) should be left alone. 

More importantly, they haven’t lost their job yet, and while they still have a job, it’s time to cut all unnecessary expenses and pile up as much as possible into the emergency fund. There is also the question of what kind of severance package might be offered. If this is an option, would it help buy a few extra months of keeping everything as-is while the original poster looks for another opportunity? 

It’s Not Stress Free Living

Even if they pay off the house, there are still insurance costs, utility bills, and property taxes, so it’s not like they will get a stress-free existence right now. In other words, this Redditor is looking to exchange being stress-free now with being stressed later when they realize they don’t have enough in a 401(k) to support themselves while retired. 

In fact, one Redditor points out that you could be creating more of a hassle for your only child, who, when they are in their 40s, may feel a burden having to take care of her parents, who are struggling financially. There is no way to get a stress-free point with this scenario, but regardless, cashing out the 401(k) is not the right option. 

Contact [email protected] for any questions or corrections.