How to Cash in Retirement to Pay Debt

If you are saddled with debt, cashing in your 401k or IRA might seem like a good idea. But it is important to evaluate all of your options before making that decision. In some cases, raiding your retirement nest egg can make sense, but it is important to understand both the short-term tax ramifications and the long-term financial pitfalls that could result from that decision.

Instructions

1

Consider your other options carefully before invading your retirement funds. You might be able to take out a loan from your 401k instead of withdrawing the money outright. You will, of course, have to pay the money back, but the money can be withheld from your paycheck, and you will be paying yourself back over time.

2

Calculate the taxes you will owe if you withdraw the money in your 401k or IRA before age 59-1/2. Depending on your circumstances you could be subject to a 20 percent tax penalty. You will also be required to pay ordinary income taxes on the money you withdraw.

3

Contact your employer and request the appropriate paperwork to process the withdrawal from your retirement plan. Fill out the paperwork completely and mail it to the address listed on the form.

4

Contact the brokerage firm or mutual fund company holding your IRA and ask to speak to a representative. Inform the representative that you want to cash in part or all of your IRA. The representative will probably explain the tax ramifications of the decision to you so you can make an informed decision.

5

Ask the firm to send you a check for the proceeds of the retirement fund to your home address, or transfer the money to your bank account. If you have a bank account on file with the mutual fund or brokerage firm, they may be able to wire the funds directly into your account.

6

Delay doing your taxes until you receive all of your paperwork from the brokerage firm or mutual fund that held your retirement account. You will need to account for those funds, and pay any taxes due, when you complete your tax return.