Question: I need cash. Is it better to sell a home or liquidate a 401k?

From what to do with your savings to how to budget for buying a new home, financial expert Gale Cunningham offers advice on how to plan ahead.

I have been unemployed or underemployed for several years now. I'm ineligible for unemployment and not likely to be hired anytime soon. I am 54 years old and own a home with an adjustable-rate mortgage. The monthly mortgage payment is far lower than rent would be if I were to move. I also have some money in a 401K retirement account.

The sad fact is that I need money for living expenses, and that means either sell stock from my 401k or sell my home. But I have no idea how to quantify which of these bad options is worse. Can you help?

Response:

This question is about a lot more than money. But let's tackle that part first, shall we?

In choosing the lesser of two evils here, know that there is one thing that even bankruptcy won't take away: Your retirement savings. However, I'm sure it's much more appealing to liquidate a 401k rather than sell a home that you're most likely attached to, not to mention the financial and emotional costs of moving. And you raise a solid argument against selling your home -- you say that rent would be much higher than your mortgage.

Let's look at the costs of going after either asset. If you sell your home, there's a huge personal and psychological cost that could impact your confidence and make it even harder to find another job. Also, since renting will be more expensive, you would not only be spending more money on rent each month but losing an asset that can grow in value and its tax deduction. As for your 401k, you can lose a leg up on growing your retirement savings, even passively, not to mention getting hit by penalties, fees and taxes for an early withdrawal.

But! Here's the good news (finally): You can lessen the penalties of taking money out of your 401k before retirement by applying for a hardship withdrawal. Contact your 401k administrator and ask for the correct forms to apply for the withdrawal. Each plan has different rules and fees but at least you may be able to avoid penalties from the IRS. For more, see here. 

Best of luck. Should you get back up to speed with your income, make it a priority to rebuild those retirement savings!

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