401(k) plan: Is it ever a good idea to make an early withdrawal?

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. 401(k) early withdrawal concerns
2. Soccer in America
3. Money, sanity, and in-laws
4. Keeping old magazines
5. Frugal vitamins
6. Tossing unhealthy foods
7. Divorce and credit
8. Switching credit unions
9. Preparing vegetables
10. Dealing with emotional old photos

Few things are more fun to receive in the mail than a handwritten letter.

In an era where it’s so easy to just type out an email to someone, a handwritten letter seems a bit anachronistic.

Yet, when you hold one in your hand, it’s a wonderful thing. Someone cared enough about you to sit down with a pen and paper and invest the time to cover that paper with their writing and thoughts.

I love handwritten letters, and I usually think highly of whoever sends them my way.

Q1: 401(k) early withdrawal concerns
Are there some instances where it’s OK to take money out of your 401K to pay off your credit cards? I’m planning on going to medical school next year, a decade after graduating from college. I managed to save $20,000 before I was laid off a few years ago. I’ve since used all of that savings and the income from working part-time to take the necessary courses to prepare me for a new career in medicine. My classes are done, my applications are ready to go, and I’m working full-time again. Here’s the problem… I ran up $11,000 in credit card debt due to not being able to get Stafford loans for my last few classes and from a couple months of living expenses before I was able to find full-time work. I’m now in the position where I can afford my monthly bills thanks to a combination of regular work, overtime, renting rooms in my house and being really frugal. However, my job (which is great experience for my future medical career and has excellent benefits) only pays a few dollars above minimum wage per hour. I am not making a significant dent in that credit card balance, the card is at 8.9 percent interest, and I am barely able to cover the minimum payments of $400/month. I’m very worried about carrying that balance with me to medical school, when I will be living off of loans. I want to pay it off in the next year … but how? I have about $38,000 in my retirement account, and I own a home I could sell, but a Realtor told me I’d be lucky to break even on the sale. I can’t sell my car, which is worth about $5,000, because I live in an area with limited public transportation and need it to get to work. I’m at a loss. Please help!
- Jenny

I would never take out retirement money to pay off credit card debt (or any other uncollateralized debt).

The math makes it pretty clear. If you take $38,000 out of a 401(k) account early, you’re going to owe income taxes on it (let’s say 25% federal and 5% state, but it depends on your tax brackets) as well as another 10% as an IRS early withdrawal penalty. Your $38,000 immediately becomes just $22,800.

If you make minimum payments on that credit card you describe, it would take you a good part of a decade to recoup the loss you’re going to take just from that one 401(k) withdrawal.

Even worse, you can’t put that money back. You’ll have to make future contributions – and you’ll have to make more than you withdrew because of the gains you didn’t earn because you took the money out.

Don’t touch your retirement money until everything else has failed. You’re nowhere near that yet.

Q2: Soccer in America
Do you think world football will ever become as popular as baseball/football/basketball in America?
- Dennis

I think it’s heading there.

Major League Soccer is setting a new attendance record every year. It has higher average attendance than the NBA and the NHL. In some communities like Seattle, it’s incredibly popular. When I was in the Seattle area last year, I saw more Sounders jerseys than Seahawks jerseys.

The last World Cup matched the World Series in television ratings in the United States for some games, and the ratings for other games were comparable to the NBA playoffs.

The coverage of European football has also grown tremendously over the last decade. When I was a kid, I was vaguely aware that there were leagues in Europe. Today, I can name most of the teams in the Premier League without much effort, simply because the level of coverage in the United States is so much higher.

I don’t think this is a sudden burst and a flameout like the soccer craze was in the late 1970s. This has been a slow build for twenty or thirty years.

Q3: Money, sanity, and in-laws
I met my future wife almost 3 years ago, and we have been dating since then. I proposed in January, and we settled on a summer wedding during July of 2013. We figured that would give us time to pay bills, save some money etc.

Im 25, make between $50,000 and $60,000 per year, and have a couple outstanding credit cards, and a car loan. Total debt (including car which is about $13k, and student loan at about $4,800 left) about $20,000. She is 24, currently works for a friend at a tanning salon, and pulls in about $7200 per year if she is lucky. Total debt for her is about $7,000 of just credit card debt.

Here is where it gets extremely complicated. She wanted to go back to school (was dying to go back and get something she could use in a career, not just continue on with her dead end job at Starbucks.) So being young enough to not get financial aid, I offered to help. That being said, her parents also offered to help, but not financially. They offered to let us live with them while she is going to school and we are paying off bills.

So now we live with my future in laws. We are being extremely aggressive with our bill payoff strategy. I feel it is important that we get all of my revolving bills (credit cards) and all of hers paid off prior to the wedding, so as to not drag bad credit from her to me. She agrees whole heartily with this.

Originally when I proposed, I had every intention of paying for the wedding by adjusting our savings and bill payoff plan (I proposed about 6 months ago roughly). Her parents generously offered to pay for the majority of the wedding (the reception, looking to be about $12,000ish) So we chose a date, chose a venue and booked the venue with a rather sizable deposit. This has given me time to pay off some credit cards, and some loans and get my bills to a solid footing. About 3 weeks ago, however, my fiance and I were hit with a bombshell. Her parents who originally offered to pay for the majority of the wedding, let us know they were completely broke until at least March of 2013 (our wedding date is set in July of 2013) and even then, they may not be able to help much.

I felt crushed. I can only imagine how they felt telling us this after offering to begin with. We are still living with them, as we have absolutely no savings (again, aggressive bill pay offs). We have no money to move out, and will not have much saved by the time the wedding does roll around. If we stay living with her parents until about a month before the wedding, it may work out, but our sanity is taking a toll living with them. Add to everything else the fact that my fiance’s truck gets about 10-12 MPG on a good day, and has been getting worse….we are going to need to buy a different car for her. Looking at how much she spends in gas each month (about $250) it makes sense to get an older reliable car (2003-2005 Honda civic or accord) that gets almost triple the mileage of her current beast. Her monthly gas bill would be reduced by the amount of the car payment itself, the insurance, and even a little bit extra.

So here is the official, not so long winded dilemma. We have to between now and next July pay about $15,000-$17,000 in wedding expenses, save about $4,000 minimum for a honeymoon, buy a car that will cost about $8,000 (obviously this does not have to be paid for totally upfront) Manage to get SOME savings put away, just to move out (about $2,200 to move into an apartment and pay the first months rent with deposits and what not) and yet somehow, still keep our sanity.

Total amount to spend between now and July 2013= on the high side…$25,000 – or roughly half my yearly income. This is doable ONLY if we stay living with her parents until the last possible moment….But…our sanity like I said, is wavering.

Any thoughts?
- Bill

My big suggestion is to get married with a very small ceremony with just a few people, then have a party at someone’s house a few days later. Don’t spend five figures on a wedding. Similarly, skip the honeymoon or do something incredibly simple.

You guys are in a world of financial hurt. Don’t spend $20,000 on a giant party when you’re in this situation.

What about the deposit? The deposit is a sunk cost. Forget about it. Look at what you have to spend going forward and minimize it.

Q4: Keeping old magazines
I love to keep old food magazines. About every three months, on a rainy day, I’ll get out a big pile of them and choose a whole bunch of recipes to make over the next month or two. I just love making new dishes for my family!

The problem with this is storage. If you have a lot of old magazines like I do, they just take up space. Do you have any ideas for frugally handling this?
- Ellen

I do the same thing with food magazines, actually. I keep old ones for a few years and go through a big pile of them every once in a while to ferret out recipes.

My solution for storage is to use a couple document boxes. These are cardboard boxes that are sized to hold paper documents, and they work almost perfectly for magazines. I keep them stored in a closet.

Once every few months, I go into those boxes and pull out a big handful of the oldest ones. I go through them, pull out recipes I want to try (often by literally tearing them out), then toss those magazines. I then add the newest handful to the box on the other end.

Q5: Frugal vitamins
Our family eats reasonably healthy but also sees the value of vitamins and fish oil for my wife, kids, and myself. The kids take a daily multi-vitamin and fish oil gummy. Same for my wife and me, but in pill form. Do you all take vitamins/fish oil? Any tips on finding good deals b/c they’re mighty expensive.
- Leon

I do not currently take any vitamins. Instead, I just strive to eat a balanced diet.

Your best bet is to buy vitamins in bulk, shop around, and check for online sources.

More than that, though, I would go to my doctor at the next checkup and have a blood screening of all common vitamins and minerals. Use that information as a basis for what you should actually be taking. If you’re normal on everything, continue as you are, but if you’re high on a lot of things, cut back. (Similarly, if you’re low in a certain area, focus in on that area). It might be useful to do this after spending a month or so without the vitamins.

Q6: Tossing unhealthy foods
I’m following the advice of my personal trainer and going through my cupboards to toss out all of the unhealthy food that I find. I’ve put it all in boxes, but now I don’t know what to do with it. It seems like such a giant waste of money to just throw it away.
- Andrew

If it’s unopened, take it to your local food pantry and donate it. Your local food pantry canalways use a donation.

If it’s opened, I would ask my friends if they wanted it. If they do, then I’d just pass it along to them.

After that, you shouldn’t be left with too much. I wouldn’t feel too bad about disposing of a bit of food in the name of health.

Q7: Divorce and credit
My husband and I bought a house in 2007. We then got divorced in 2010. My ex-husband got the house in the divorce. My divorce decree says that I am free and clear of any debt or interest to the house. But, if he does not pay for the house, because my name is still on the mortgage, I am responsible for paying for the house. I can not afford to pay for the house I live in and pay for my old house. I have been told that the only way to get my name off of the house was for it to be sold or refinanced. It was said in our divorce that he had one year to get my name off. He did not do so. I am trying to figure out if there is a way to get my name off of the house, and if he doesn’t pay for it and it goes back to the bank, is there someway to save my credit since he got it in the divorce? I am looking for advice on how to handle this situation. I tried to talk him into putting it up for sale since he is not living in it and the realtor told me I could not, because he got the house in the divorce. What can I do to save my credit if he lets it go back to the bank. I have worked really hard for my credit and I don’t want it to be ruined. I am a single mom with three kids and won’t be able to buy anything with a house going back to the bank on my credit report.

What can I do? Do you have a solution or advice for me please?
- Sara

If he didn’t follow the divorce decree, you should follow up. The first step is to ask him, of course.

After that, the next step I’d take is to contact the clerk of court from where your decree was issued and ask about the procedure for enforcement. Keep following up on that procedure, as this is the type of thing that can be ignored or swept under the rug by an overburdened legal system.

You have to be patient and persistent. If your decree said that your name had to be removed, then it should have been removed. The law is on your side, but the wheels turn slow.

If you ever feel frustrated or over your head while doing this, contact your divorce lawyer. It will cost you some money, but it will get the situation resolved.

Q8: Switching credit unions
I’m new to the credit union scene and went with a small operation in the most convenient location. In February, I set up checking (still have a primary acct at big bank), savings (emergency fund moved from big bank), a 4-year auto loan, and a balance transfer on a CC that will be paid off in 12 months, according to my budget. They said it would take two billing cycles to set up auto-billpay for my CC. I even followed up in person to make sure. But wouldn’t you know, it only took one. I had already made last month’s payment, so they said they’d reverse their payment. They went in and reversed BOTH payments. The customer service has been lousy and I’m inclined to move my business elsewhere.

Several contacts have recommended another CU in town. Would it hurt my credit score to do another balance transfer after only a few months at this CU? Should I give this CU another chance? I’d like to think I came in with really basic, straightforward requests; I pay my bills on time and love & appreciate auto-billpay. Please advise!
- Jeff

It sounds like you’re in a pretty awful credit union. Their customer service should be able to easily handle these requests. I’d move my business, too.

You haven’t really been with this union long enough to have established a strong relationship with them, so I wouldn’t feel bad about leaving.

This is one of the reasons why I believe that customer service is a huge factor for your primary bank, far more than interest rates and such. What good is an extra 0.25% return on your savings account if you have to deal with messes like these?

Q9: Preparing vegetables
I’ve been trying to improve my diet lately and that means incorporating more vegetables. The problem is that I don’t really like eating them. You’re a vegetarian, so what do you do to make veggies tasty?
- Andre

I season them. Ground black pepper, oregano, rosemary, basil, and so on. Try herbs and spices until you find what you like.

I really like grilled vegetables. One thing I love to do is dip summer squash and zucchini slices in a bit of olive oil, sprinkle some black pepper and oregano and basil on them, and then grill them until they’re just lightly brown on each side. Delicious.

Another tactic is to wrap vegetables in aluminum foil with an ice cube or two and a lot of seasonings. I then grill this packet for half an hour or so (longer for starchy vegetables like potatoes).

Just experiment until you find things you like. If you don’t like something, never use that tactic again. Try something different next time.

Q10: Dealing with emotional old photos
I’m 28. My mother passed away two years ago very suddenly. It was a suicide. While not entirely unexpected (she’d become severely mentally ill) it was very traumatic, especially as one of her primary caregivers. I’ve gone to therapy and feel I’ve made a lot of progress. I’m in a much better place in my life now.

I currently have all the photos from my mother’s house. They take up the entire closet of my second bedroom. They document everything from before I was born up until recently. There are thousands of pictures. The albums are the only photos my family has – my mom took them all in the divorce. My dad (who has since remarried) has made it clear he really wants copies of everything, but wasn’t willing to fight my mom for them. Knowing my mother, I don’t blame him.

In the fall, my boyfriend of 5 years is moving from the US to Canada to live with me. We hope to start a family in a few years. I’ve cleaned out half of my closet and storage spaces for him, and made space for anything he might want to display. We want to set up the second bedroom as an office, but with all the photo albums in there (some of which are spilling out from the closet into the actual bedroom) there is no space. It’s depressing to even be in there. I avoid the room entirely, making it a completely non-functional space.

I’ve tried to scan the pictures. Every time, I wind up in tears, reminiscing, without any progress. I’ve looked into online bulk scanning, and it seemed promising. My brother and dad both vetoed sending the photos off for scanning as they’re afraid we may lose them in transit. However, both find the job of sorting/scanning emotionally taxing and have been avoiding it. Something needs to be done, and soon. I’m afraid of losing the photos in a fire or some other disaster permanently. I would ask my boyfriend to help, but he won’t be here for another six months or so.

These photos have been sitting in my closet and weighing on my heart for almost two years now. Do you have any suggestions?
- Brianna

My suggestion would be to find a local photography business that could do this for you. While you might have to pay more, a local business eliminates the risk of having to ship these priceless photographs.

Many of these businesses have a system where they can literally put a stack of photos into the device and the device just automatically scans and saves them. Thus, the price ends up not being too terribly high.

Once you get the photos back, check the digital images. This will be emotionally hard, but you want to make sure that all the images are there and there aren’t any major problems with them.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.