AboutScott DeMonte Expertise A notable expert in annuities, variable, fixed and equity index products, with an emphasis on variable annuity products. I can answer questions on living benefits, taxation of annuity proceeds, the risks and benefits of all annuity products. Also, with my vast experience as a financial adviser I can answer general investing questions. I will always give you the facts, good or bad.
Experience I have over 15 years experience as a financial adviser. I was also a Regional Vice President for 2 major insurance carriers, and own AnnuityIQ.com, an unbiased variable annuity rating and comparison site. A known expert in the inner workings of annuity products who has been quoted in Investment News, Consumer Reports, American Banker, Annuity Market News and other news outlets.
Expert: Scott DeMonte Date: 6/30/2008 Subject: cashing out a 401k plan
Question I have a daughter who is starting college in January. We had a heloc on our house that we were going to use to help with her college expenses. Since the decline in values in Central CA they have cut our heloc from $20,000 to $6000. We have a 401k that we are not contributing to from my husbands previous job. He has to other 401ks that we're contributing to. The one we were thinking of cashing out has $20,000 in it. My daughter is going down to Fresno State for the ROTC program for the air force. What would be the consequences of cashing the 401k out or what can we do?
Answer Hello Nancy,
I feel for your position as I have two children as well and the cost of college is astronomical. If you cash out the 401 k plan, I assuming it is with an ex-employer, then there will be significant tax consequences.
Cashing out directly from a 401 k plan will cost you a 20% tax penalty right off the bat and then the proceeds will be taxed at ordinary income. It would be wise to roll over the 401 k plan to an IRA and then take the balance, if that is what you choose to do, as there is only a 10% early withdrawal penalty. Also, if you have not used IRA assets to purchase your home or fund another child's education then you are allowed to take out $10,000 penalty free, not tax free, to pay for the cost of school.
I would strongly advise against cashing out the retirement account in general because of the taxes and the need for long-term savings, but in the real world one may not have a choice. If it is possible, you may want to see if your bank will renegotiate the HELOC to a higher value, but that may be unlikely given the lower prices for homes, particularly in your area. If this is not possible then roll over the old 401 k plan to an IRA and then take the withdrawal.
You may want to search for other smaller grants or scholarships that are available. There are a ton out there if you search for them, but time is not on your side so start now.
