4 Women Explain Why They Liquidated Their 401(k)s — & If It Was Worth It

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We've all had, or will likely have, at least one heart-stopping money moment in our lives — a medical bill that seems insurmountable, a move that's more expensive than anticipated, a period of unemployment that we'll have to float through somehow.
The point of building up an emergency fund is to tackle unexpected costs, big and small, but with 40% of Americans unable to pay a surprise $400 expense, finding that cash can be tricky. In some cases, that's when that good-old 401(k) starts to look very tempting ... even if using that money ASAP will hurt your financial situation later on.
In the long term, you'll have spent money that will be necessary to support yourself down the line. (And as many as one-third of Americans has $0 saved for retirement.) In the short term, those who cash out before the designated age of 59 1/2 face steep costs — an immediate 10% penalty, and taxes "that can approach 50% for people in the top income bracket." Taking out a loan is a somewhat better option, but if you don't pay the money back within the designated time, you'll be hit with all the same fees and penalties.
Nonetheless, an Ameriprise study found that 23% of adults with pre-tax retirement plans have withdrawn funds or borrowed money from their accounts. We talked to four women who have done so for various reasons about why they made that decision, what they used the money for, and if they'd do it again.
1 of 4

I didn't want to ask my parents for money.

Name: Olivia

Age: 25

What made you decide to withdraw money from your 401(k)?
"I made my first withdrawal at 23. My roommates (my two best friends from college) wanted to move into Washington, D.C. after living outside of the city for 16 months, but I didn't have enough money for the deposit or moving fees. I figured that renting a one-bedroom apartment alone would put me in a worse financial position than if I took a small loan from myself to help set myself up in our new home. I dipped into that account other times when I was low on cash and didn't want to ask my parents for money. I have made multiple withdrawals — probably around $3,000 around every six months — so in total, maybe six times. Some were to lower credit card payments and others to fund larger purchases like a vacation."

How much money was in the account and how much did you get back?
"There was $38,000 in the account. I was taxed about $4,500 after I withdrew $10,000 from the account."

What is your financial situation now?
"Not much better, but I'm contributing to my job's 401(k) account again and am restarting my savings after getting out of some credit card debt."

Upon reflection, how do you feel about your decision to withdraw the money?
"In hindsight, my first time withdrawing the money, it was [simply] what I needed to do. (I also ended up making more money after the move and working closer to home.) However, it did set a bad precedent for me [about thinking of the account] as extra cash whenever I need it; the taxes really get you."
2 of 4

Since I was already in debt, I decided to cash out my 401(k).

Name: Michelle

Age: 36

What made you decide to withdraw money from your 401(k)?
"At 31 years old, I broke off an engagement to someone I had dated for eight years. We lived in the house he owned and when our relationship ended, I was entitled to nothing. I left with my clothes, the dining room table my grandmother bought me, and a few decorations. I had to move in with my dad for nearly a year. I was completely broke and almost $20,000 in debt.

"I shopped to make myself feel better, but I was still paying off thousands of dollars from a wedding I would never have — another thing I was stuck with because I was the one who ended things. (I couldn't even sell my ring; my ex took it while I was sleeping.) Since I was already in debt, I decided to cash out my 401(k)."

How much money was in the account and how much did you get back?
"I had $10,000 in my account, which was the amount I put in plus the company match. Due to penalties from withdrawing it all early (including taxes on the company match), I had to pay a $4,000 lump sum to the IRS.

"I moved out of my dad's place after about 10 months because I was ready for some distance at that point. I used the money from my 401(k) to pay the first few months of rent on my apartment, buy furniture, and pay off some of my credit card debt.

"My mom, who does my taxes, was furious with me for owing the government nearly $4,000. Were those couches really worth it?! Honestly, yes. Living on my own for the first time in nine years was worth it."

What is your financial situation now?
"I met my soulmate right before I turned 33. After we got engaged, we started talking about buying a house. The 401(k) plan at my new job was pretty measly and my fiancé, who is five years younger than me, had never put money into a 401(k) of his own at that point.

"It took us until last year to finally get out of debt and buy a home, and we began meeting with a financial advisor to make sure neither of us did anything stupid with our money again. Still, we barely have any savings and have taken out pretty aggressive life insurance policies that we can borrow from if we need to after we retire. God forbid, those will also take care of us if anything happens before then, as neither of us has savings or investments to live on without the other."

Upon reflection, how do you feel about your decision to deduct the money early?
"Be smart and don't cash out your 401(k). Get a second job to pay off your debt, stop shopping, and sell what you can. Even if you don't have a husband, house, or children now, you'll probably want them down the road; this decision will affect their future as much as yours.

"I still feel the impact of my decision six years later. I was $20,000 in debt when I met my current husband, and I realized I had to get serious and pay it off. I got a second job and managed to pay off my credit card while we were planning our wedding; that was the most amazing feeling!

"After buying our home in April, we're both carrying about $5,000 total on our cards. My husband is an engineer and is incredibly good at budgeting and forecasting, so twice a week, we sit down, go over our bank accounts and expenses, and figure out a plan for the upcoming week about how much to put toward our bills and cards. Looking at everything together helps keep us accountable and able to set goals and celebrate after we meet them."
3 of 4

We were able to move, follow our dreams, and start a new adventure in our lives.

Name: Laura

Age: 29

What made you decide to withdraw money from your 401(k)?
"I cashed out my 401(k) back in March 2018. Last year, my husband and I decided to move from Atlanta, GA to New York. Before we moved, we came up with a list of goals: Get out of credit card debt ($12,000), build up our savings, and figure out how much money we could live off of before finding jobs.

"Making the move was a big decision for us. My husband and I consulted a marriage counselor to ensure that totally uprooting our lives and starting anew in a brand new city would be a good idea. We are lucky to have a generous relative in Upstate New York who was and still is happy to house us. He does not want money from us, so we're not spending any money on rent or utilities. We have been here for about three months now and are actively searching for jobs in the city, where it is our goal to work and live.

"I am happy to say that we accomplished our financial goals prior to moving. However, I realized that our job hunt could take time and finding an apartment in the city could require a lot of liquid cash up front. My husband and I are terrible at saving money. Over the last year, we made sacrifices to ensure we were paid off our credit card debt and put as much money as possible into savings. But I was still fearful that our attempts to save would not cover us for a few months in New York.

"My husband's 401(k) is small and was not worth touching; mine, however, had a good amount. When leaving my employer, I learned that I had two options: to not touch it or to withdraw all of it. I chose the latter. In addition to the 401(k), we also sold our house and one of our cars. If we make it to the city, we will more than likely sell the other car, too."

How much money was in the account and how much did you get back?
"I withdrew the full amount, $28,000. Yes, I realize the risks and that I'll have to pay in taxes next year, so that amount will not be touched in our savings — plus some, just in case."

What is your financial situation now?
"Since we moved, I've generally transferred $1,700 from our savings account into our checking account each month. That takes care of our normal monthly expenses (car insurance ($70/month); phone bill ($200/month); POD storage bill ($300/month); groceries ($300/month); car payment ($357), and other miscellaneous items ($200/month for things like Netflix, LinkedIn, shopping, trips to the movies, etc.). That $1,700 also includes a buffer for extras that come up (eating out with family, doggy daycare, and days we spend in NYC).

"My husband recently started a new job in town to increase our cash flow, mainly to prevent us from transferring money from our savings account each month. (We have about $25,000 in savings after selling the house, car, etc.) His new income may be small, but it has been enough to bring us back to the savings amount we had before we moved. (He gets paid weekly — about $430/paycheck after taxes.)

"We do live comfortably: we go out to eat occasionally and sometimes I do a little bit of shopping. My favorite thing to do is go to the movies, so we budget for that monthly as well."

How do you feel about your decision to deduct the money early in hindsight?
"When I withdrew the 401(k), my mindset was: I care about now-Laura, not old-retiring-Laura. I believe that the risk is worth it, as we were able to move, follow our dreams, and start a new adventure in our lives."
4 of 4

I lost a ton of free money.

Name: Morgan

Age: 37

What made you decide to withdraw money from your 401(k)?
"I signed a book contract, and when you do that, you get paid in thirds: one-third on signing, one-third on delivery of the manuscript, and one-third on publication. When I got the book deal (which was in the low six figures), I quit my job — then I went overdrive on delivering the manuscript. I saw all the money in the account and was like, Yay, free money! It was most definitely not."

How much money was in the account and how much did you get back?
"I was 33 when I liquidated the entire account, which had $30,000. They take an immediate 10% penalty, so I got a check for $27,000. At tax time, I wound up owing about $16,000 on the withdrawal."

What is your financial situation now?
"The second installment of my book payment mostly went to paying taxes on the 401(k) withdrawal. I now have a small IRA and separate 401(k) — probably about $10,000 total. I have no liquid savings."

How do you feel about your decision to deduct the money early in hindsight?
"Don't do it! I literally cannot think of a reason you should do this unless your loved one is being held for ransom, and even then, I would think long and hard about it. My old company gave me a huge match, so I essentially lost a ton of free money. Don't. Do. It."

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