Financial Planners: I make about 80K a year and have good credit (mid 700%26#039;s). I live within my means and dont have any extravagant outlays ( I budget and stick to it). Thanks to a layoff which took me 1.5 years to get a new job (at a 50% pay cut), I now have 35K in credit card debt. I avail myself of many -0- interest offers and transfer alot to reduce my interest paid but I still have some interest-bearing accounts. I have about 10K in 401K. All the financial GURU%26#039;s say don%26#039;t rob your 401K to pay off credit cards. But, I don%26#039;t understand their logic $-wise. Now, I totally get that most Americans don%26#039;t have the discipline to save for retirement and discouraging it for THAT reason is wise. But, I AM very disciplined and once this debt is paid off would rebuild my 401K. Factoring in my commitment to rebuild the 401K, why should%26#039;nt I reduce my debt now by using that money and re-build later?
I know Fin. Planners say don%26#039;t rob your 401K to pay off credit cards. Why?cash loan
1) If you %26#039;rob%26#039; your 401(k) you will be hit with a large tax on the disbursement, something like 30+% because the 401(k) was funded by pre-tax earnings. So, you will only receive 6-7k out of the 10K and pay 30% to reduce your credit card balance minimally.
2) If you are able to take a loan against your 401(k), you will still have to make repayments each pay period and you lose any earnings on that money you borrow against.
The best thing to do would be to get the best (lowest) rate you can, payoff as much as you can as quickly as you can and do not add anymore charges. It may take you a while, but it will be worth the effort.
I know Fin. Planners say don%26#039;t rob your 401K to pay off credit cards. Why?
loan
Your 401K is your retirement portfolio and I agree it shouldn%26#039;t be touched, unless you really have an emergency.
~:)~|||Since your 401K won%26#039;t pay off your bills, why bother
If you insist on doing this, borrow as much as you can rather than withdrawing the money. At least the interest you pay replenishes your account.
If you withdraw everything from the 401K will the employer close your account? Will you lose matching contributions? You certainly will lose the power of tax free compounded growth.
The only real way most people can save enough for retirement is to maximize the use of tax shelters and take advantage of time. If you take the money out of your 401K you are losing the time advantage. You are cutting down the amount of time you have to allow your money to grow through compounding.
Figure out how long it will take you to get your 401K back to $10K. Figure out how much you lose in matching contributions and figure out how much tax free compound growth you will forfeit over that time period. I think you will see it makes more sense to leave the 401k alone.|||Aside from the discipline required to save that you mentioned, you may create additional tax liabilities if you cash-in your 401K in order to repay your credit cards (and penalties). In addition, in the event of a personal bankruptcy, your 401K is protected from creditors. This in itself may be very valuable and reason enough not to tap into the account. Checkout the following site for more information on 401K and IRAs:
http://www.taxdeferredstrategist.com/
If you are set on using the funds in your 401K to repay your debts, check your plan since you may be able to borrow against your 401K. The interest that you pay on the loan typically will go back into your account. However, there%26#039;s an opportunity cost involved since you will earn the loan interest, but you will forgo any returns on other investments like stocks (effectively the loan becomes the investment).|||You say %26quot;I am very disciplined...%26quot; but at the same time give sufficient information in the rest of your question that proves this is not the case! I%26#039;m sorry you had to go through a lay-off, but that happens to almost everyone at least once. You were earning $160K a year before you lay-off and you weren%26#039;t able to put $35K away in case of emergencies?
The main reason not to tap your 401(k) is that the math makes no sense. Even if you were paying 15% on the credit cards, you would be %26quot;throwing away%26quot; less on interest than you will %26quot;throw away%26quot; in penalties %26amp; taxes by cashing out the 401(k)
Do the math: $10,000 minus the penalty minus the taxes will leave you with between $4000 %26amp; $5000 clear, which is about 14% of your credit card debt, hardly making a dent.
$35,000 is only 14% of your next three years salary (less if you get any raises). Give yourself a 14% pay cut, sent it directly to the cards, and in three years you%26#039;ll be debt-free and still have your 401(k)...
Best wishes...( and I hope you have cut your cards up!)|||You%26#039;ve already been told the reason by other posters: the fees and taxes you have to pay on the 401k disbursement are much more than the interest on your credit card debt. Sounds like you just don%26#039;t like to wait for anything.
But for your sake as I fear you will ignore this good advice, I will relate to you some hard figures from real life. My husband decided to quit his high-paying job a couple of years ago and start his own business. He did not do any planning beforehand and did not consult me before telling his boss he hated the place and would never be back. We had recently purchased a house at the high end of what we could afford, and then had to make some unexpected repairs to it, so we had no savings. He decided that we could live on his 401k since it was approximately $50,000. The one good decision he made was to check the box and have the investment company withhold the federal tax. We received a check for $34,000, and at the end of the year had to pay and additional $2,500 in state taxes and fees. It was not worth it. And in case you%26#039;re curious, no, his business never made a penny and he had to take another job for less money.|||Because the financial planners care about keeping your money under management so they can collect fees on it.Financial planners care about themselves not about you.Managing your own investments is not that hard,read and educate yourself and do not become brainwashed by the so called experts.|||Because the credit card debt is finite and short term in comparison to your retirement. You don%26#039;t say how old you are but let%26#039;s assume you%26#039;re 35. You have 32 years to retirement. If you don%26#039;t contribute another dime to that 10k and it earns 8% a year, that will grow to around $128,000 at your retirement. Which would be tolerable if you were able to pay off 100% of your debt, but you%26#039;re not.
So let%26#039;s turn to the debt. Assuming you want it paid off in 6 years (hey it works for cars!) and you have a 12% rate on the cards then it will take a payment of 685/month to pay those off. But if you take out a distribution of your 401k (assuming you can get all of it) you will get 6k from it. That drops your debt to 29k which will make your payment $567. So that savings of $118/mth will cost your retirement $128,000 when you retire.
But but but you say...I%26#039;ll be able to contribute once it%26#039;s paid off. To that I say %26quot;yep!%26quot; After it%26#039;s paid off in 6 years you can start paying 567 a month (earning 8% still) and your retirement would be $591,047. OR you can keep that 10k in there and switch that 685 over to your retirement after 6 years and have $842,315. To get to that same 842k balance you%26#039;ll have to begin to make a $807/mnth contribution after the 6 years is up.It%26#039;s your choice! You can take the 567 balance and then up it to 807 in 6 years or you can make a 685 payment and not make any changes
Look, if you%26#039;re as disciplined as you say you are then look at it long term...the miniscule benefit that you receive now in terms of a lower payment will end up costing you hundreds of thousands of dollars down the road.
What you have to do is set a finite goal for yourself...saying I will pay this debt off by 2013 and put yourself on that budget. Make it an automatic payment and step away! Contribute nothing to your 401k (unless there%26#039;s a match then contribute the amount to get that match) and put EVERYTHING you currently have extra into paying down that debt. But don%26#039;t touch the retirement.
That being said..if after 4 years you feel the need to rid yourself of that debt, then take a loan from your 401k. Since you%26#039;re paying yourself back with interest, the damage is minimized.|||If you go bankrupt they can%26#039;t touch the money in your 401K, it is legally protected from all liabilities. Once you take that money out of the account, you lose the protection. Also you are going to need over a million bucks for retirement, if you drain your account now, how will you ever be able to catch up?
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