Using The 401(k) Money

Monica is 29 and owns her home. She has some student loans and a mortgage, and she just got laid off this morning. She has $15,000 in a 401(k) and wants to know what she should do with that money.

QUESTION: Monica in Texas is 29 and owns her home. She has some student loans and a mortgage, and she just got laid off this morning. She has $15,000 in a 401(k) and wants to know what she should do with that money.

ANSWER: Roll it to an IRA and cash it out only if you have to. Do a traditional IRA because a Roth IRA will be taxed, and you don’t need another bill right now because you’re unemployed and have debt.

Any time you take money out of a 401(k) or an IRA, the government is going to tax you 10% plus your tax rate. That’s going to end up being 30% or 40% of your money they take, so don’t borrow that money at 30% interest to pay off your debt, have an emergency fund or pay for a wedding.

We would only do that to avoid a bankruptcy or to keep a foreclosure from happening.