Pausing For Adoption

Tim and his wife can't have a child. They would like to adopt. Tim has $16,000 in a 401(k), and he and his wife are wondering if they should use that money to pay off some of the $40,000 student loan debt.

QUESTION: Tim in Denver and his wife have been trying to have a child for five years, but they’ve discovered they can’t have a child. They would like to adopt. Tim has $16,000 in a 401(k), and he and his wife are wondering if they should use that money to pay off some of the $40,000 student loan debt. They make $70,000 a year. Dave disagrees with cashing out the 401(k) and gives Tim some other ideas instead.

ANSWER: I can’t think of anything more important than having kids and raising kids if that’s what your call is, and I just think it’s awesome.

I certainly would not tell people to borrow. No, I would not cash out your 401(k). The government’s going to take half of your money if you do that. They’re going to charge you a 10% penalty plus your tax rate, and you’re in a 25% tax bracket, so that’s a 35% hit. So if you take out $16,000, they’re going to charge you $5,200 in taxes and penalties. It’s like saying, “Dave, I want to borrow money at 35% interest to pay off my debt.” Not a good plan. So we’re not going to do that.

Let’s leave that alone, but I might push pause on my debt snowball given your numbers in your situation and say, “Real quickly, we’re going to throw $15,000 into an account to do an adoption—with cash.” Then I’ll push play on my debt snowball again.

It’s kind of like you were pregnant and you had to pay for a delivery. You push pause your debt snowball for a little bit and take care of the delivery. Then you push play again after the baby came, right?

Please don’t call me back and tell me your adoption cost $35,000 because I will tell you that you did not do good research. Fifteen will do it, but you’ve got to get into it and learn. There is a book called Adopt Without Debt. Go get that book. You can get it on Amazon. The lady’s name is Julie Gumm who is the author. We’ve had her on the show.