Withdrawal former employer 401k to pay off CC?

[hohlernr]

Hello everyone, new to the forum and looking for some good advice! Thanks in advance!

I am 23 years old and a recent grad from college. I have a comfortable job (70k per year) and live with my fiance who makes about 50k per year. Thus, both of us are very fortunate in these tough times.

During college I co-oped at a company that offered a 100% match towards a roth 401k up to 7% of total salary. So I took advantage of that and contributed 7% for roughly 1.5 years of service and have 10k in that 401k now. I also now have another 401k w/ my current employer and contributing 10% of my base pay with a match of 4% of my total salary.

I also have the following credit card debt:
$2,369 @ 15.25%
$3,900 @ 16.74%

Was wondering if I should take out that 10k in my old roth 401k and pay off my credit card?

I'm thinking I should since the cc interest is much higher than any returns I can get plus it would be nice to be out of cc debt!

Let me know what you guys think? Thanks!!!!

[disneysteve]

Originally Posted by hohlernr

I have a comfortable job (70k per year) and live with my fiance who makes about 50k per year. Thus, both of us are very fortunate in these tough times.

have 10k in that 401k

I also have the following credit card debt:
$2,369 @ 15.25%
$3,900 @ 16.74%

Was wondering if I should take out that 10k in my old roth 401k and pay off my credit card?

I'm thinking I should since the cc interest is much higher than any returns I can get plus it would be nice to be out of cc debt!

Welcome to the site. Let me tell you how this question ALWAYS gets answered around here. It is usually some variation of, "Are you nuts?"

Seriously, the two of you earn $120,000/year and you can't manage to pay off $6,200 worth of debt without cashing out your retirement savings? If that's the case, there is something seriously wrong with your budget. Post your expenses for us to review and I guarantee we'll point out where you can get the cash to pay off the cards.

[hohlernr]

I can get them payed off, I've actually been using the 'snowball technique' and have already payed off 2 smaller credit cards. These are the 2 credit cards left and I plan to pay $400 per month on the smaller one while paying the minimum on the other until eventually both of them are payed off.

So basically I'm paying $500 per month on my CC debt now, but was wondering if would make more sense to just take out that 401k and wipe out my cc debt? Then that would give me the peace of mind of having no cc debt and then I could increase my 401k investments.

[jpg7n16]

You should rather consider a 0% balance transfer to reduce interest costs, while keeping the funds invested. There are serious tax implications of a 401k early withdrawal. However, there are no tax penalties for transferring the balance to a 0% card.

https://www.google.com/advisor/uscre...a&si=4&start=0

Citi Platinum Select Card | Credit Requirements & Reviews

You can save yourself a $600 tax penalty by finding another way to take care of the debt issues.

And you make enough money that there are several other options.

[disneysteve]

Originally Posted by hohlernr

I can get them payed off, I've actually been using the 'snowball technique' and have already payed off 2 smaller credit cards. These are the 2 credit cards left and I plan to pay $400 per month on the smaller one while paying the minimum on the other until eventually both of them are payed off.

So basically I'm paying $500 per month on my CC debt now, but was wondering if would make more sense to just take out that 401k and wipe out my cc debt? Then that would give me the peace of mind of having no cc debt and then I could increase my 401k investments.

If you are using the snowball method, I'll assume that you are at least familiar with Dave Ramsey even if you aren't totally following his plan. I can tell you from listening to his show many, many, many times that he would advise not cashing out your 401k to pay off your debt. He would, however, advise you to stop contributing to your 401k until you have your debt paid off.

That said, I don't necesssarily agree with him on the latter point. Given your income, you should be able to easily continue putting 10% into your 401k and get rid of this debt pretty quickly. At $400/month it will take you about 16 months to pay off the cards. Plenty of people call into the DR show to say that they've paid off 5 times as much debt as that earning half as much as you do. So I'd still suggest that there is a problem in the budget that needs to be looked at.

As for the 401k, keep in mind that if you cash it out, you pay a 10% penalty and income taxes on the money so you'll lose about $3,500 to the government just to pay off $6,200 in credit card debt. That's a pretty huge waste of money to get "peace of mind."

[hohlernr]

That makes a lot of sense with the penalties (totally forgot about that). I'm going to look into signing up for a 0% balance transfer cc. If I do, should I consider canceling the other cc's (right now I have 4 total w/ 2 payed off) or maybe just keep 1 or 2 of them?

Right now, my budget is fine the money that's not going towards my bill is going towards saving for my wedding/honeymoon ($715 a month) and that leaves me about $500 per month that I'm saving for my 'Emergency Fund'.

Take home pay is $3,600
Rent - $425
Cell Phone - $70
Utilities - $70
Internet - $24
DirecTV - $35
Car Insurance - $200 (dumb michigan no fault insurance increased my ohio insurance by $125)
Renters Insurance - $8
Gas - $120
Credit Card - $500
Wedding - $715
Car Payment - $235
Gym - $42
Groceries - $250
Eating Out - $100 (working on trimming this)
Movies (renting and theatre) - $35
Clothing - $100 (don't buy much except for work and the occasional dress shirt for weddings and etc.)
Supplements - $60 (I'm a health freak and buy a lot of vitamins and protein and etc)
Hobbies - $100 (working on cutting this down)
Miscellaneous - $100 (for the random thing that pops up from month to month)

Extra - $411 (this goes towards my 6-month emergency fund)

[jpg7n16]

The balance transfer does just that - transfers the balance only. It doesn't close your current card out. If you were able to do a balance transfer, you would just open 1 new card, and transfer the balances from the 2 cards charging interest.

I would only close the cards out if they are charging you a fee.


As far as your budget goes, I don't see any glaring issues actually. Everything is pretty reasonable IMO.

Add up the $500 for CC (guaranteed that this is more than the min payment), $715 for your wedding savings, and $411 left over - that means you are not spending $1,626 each month (45% of takehome pay) With such free cashflow available, I see no reason why you wouldn't be able to transfer the balances to a 0% interest card, keep your 401k in tact, pay for your wedding, and be out of debt in a year - while paying no interest at all to do it.


FWIW - I would get a 2-3 month EF in place, then eliminate the debt, then fund the wedding completely, then build up to 6 month EF.

[disneysteve]

Originally Posted by jpg7n16

As far as your budget goes, I don't see any glaring issues actually. Everything is pretty reasonable IMO.

jpg and I are usually of the same mindset around here but this time I'm going to respectfully disagree. I think your budget would be reasonable if you didn't have $6,200 in high interest credit card debt hanging around.

You list a number of luxury expenses that could easily be reduced or eliminated temporarily to allow you to get rid of the debt faster without bothering to refinance the debt with a new card and certainly without raiding your retirement savings.

Originally Posted by hohlernr

Eating Out - $100 (working on trimming this)
Movies (renting and theatre) - $35
Clothing - $100 (don't buy much except for work and the occasional dress shirt for weddings and etc.)
Hobbies - $100 (working on cutting this down)

Extra - $411 (this goes towards my 6-month emergency fund)

Eating out can be eliminated short term
Movies can be eliminated short term. Use the internet to find free things to watch.
Don't buy any new clothing. I'm willing to be you have everything you need right now to get you through the next 6 months.
Stop the hobby spending for now.

I do agree with jpg about halting the EF savings at about 2 months worth and redirecting that $411 to the CCs. If you already have more than 2 months worth in your EF, take out the excess and send it to the CCs. With the $500 you are already paying on them and an additional $411 from this, the time to repayment drops to about 7 months even if you don't make any other spending cuts. If you can go 3 months with no eating out, movies, clothing or hobby purchases, the repayment drops to under 6 months or less. Short term pain for long term gain.

I think you guys are doing great. You are living well below your means overall and just need a minor adjustment to your priorities. Once the debt is gone and the wedding is paid for, you'll have $1,600/month in free cash flow which is fantastic and will allow you to really boost the savings and start building wealth.

[riverwed070707]

I assume this is just your budget, not including your FIs income. HOw much are you saving for the wedding between teh two of you? Why does wedding savings come before taking care of your CC debt? If you threw that money plus your current snowball amount and the money you're currently putting toward savings at that debt it would be gone in 4 months...would that really be an unrecoverable setback? Then you'd be able to save $1,215/mo toward the wedding to catch up. Cut a couple guests or lower your meal cost a couple bucks a plate and you won't even notice the difference.

[bjl584]

I see no logical reason to cash out your retirement. Your income is high enough that your credit card debt is more than manageable. You are already snowballing the debt, so just be patient. It will get paid off. No reason to panic and cash out your retirement.

[disneysteve]

Originally Posted by hohlernr

I have a comfortable job (70k per year) and live with my fiance who makes about 50k per year.

Take home pay is $3,600

Originally Posted by riverwed070707

I assume this is just your budget, not including your FIs income.

I completely overlooked that. Yes, the $3,600/month is just your income. If you are covering all of the household expenses (rent, utilities, TV, Internet, food, etc.) where is her money going? It sounds like you are living just fine on your income. Her take home is about another $3,000/month. Unless there is some major expense you haven't listed, or she has debt that you haven't told us about, it sounds like you should be able to clean this up in 2-3 months tops.

[hohlernr]

Let me clear something up. Since we are not married yet, we are keeping all of our finances separate. So, she basically has the same budget as I do minus a few things such as the wedding savings (she graduated a year before me and has more saved up) and credit card debt.

The money I set aside for the wedding is really non-negotiable. We already have our date set to next september and have a good estimate of how much everything will cost, 20k. I realize that's a lot, but we both have larger families and neither of our parents are really in a position to help us out much, so we are stuck with the bill. I'm sure a lot of you will think that's a bit much to spend for a wedding, but she's always wanted her perfect wedding and I think both of us are lucky enough to make a good living that we felt that this is something we can afford with careful planning.

I've already signed up for a 0% balance transfer cc to hopefully rid myself of the interest payments and by the time the promotional period ends, I should have the credit cards payed off. I'm also going to work on cutting my discretionary spending down and putting more of the at towards my ccs.

[disneysteve]

Originally Posted by hohlernr

Let me clear something up. Since we are not married yet, we are keeping all of our finances separate.

Smart idea.

The money I set aside for the wedding is really non-negotiable. We already have our date set to next september and have a good estimate of how much everything will cost, 20k. I'm sure a lot of you will think that's a bit much to spend for a wedding

No complaints from me. I have no problem with someone spending 20K for a wedding as long as they can afford it and aren't neglecting other financial needs in order to do so. If a couple has a bunch of debt and/or has to take on new debt to pay for the wedding, that's where I'd have a problem. Or if the couple was paying for the wedding but had no savings, wasn't funding retirement, etc. It sounds like you guys are on the right track.

I've already signed up for a 0% balance transfer cc to hopefully rid myself of the interest payments and by the time the promotional period ends, I should have the credit cards payed off. I'm also going to work on cutting my discretionary spending down and putting more of the at towards my ccs.

I think that's a reasonable plan. Probably not the route I would have gone personally but it will get the job done and save you money in interest payments. I see no reason why you can't have that money repaid in an absolute maximum of 6 months.

How much debt does your fiance have? Is she similarly working on getting that repaid?

[riverwed070707]

Originally Posted by hohlernr

Let me clear something up. Since we are not married yet, we are keeping all of our finances separate. So, she basically has the same budget as I do minus a few things such as the wedding savings (she graduated a year before me and has more saved up) and credit card debt.

The money I set aside for the wedding is really non-negotiable. We already have our date set to next september and have a good estimate of how much everything will cost, 20k. I realize that's a lot, but we both have larger families and neither of our parents are really in a position to help us out much, so we are stuck with the bill. I'm sure a lot of you will think that's a bit much to spend for a wedding, but she's always wanted her perfect wedding and I think both of us are lucky enough to make a good living that we felt that this is something we can afford with careful planning.

I've already signed up for a 0% balance transfer cc to hopefully rid myself of the interest payments and by the time the promotional period ends, I should have the credit cards payed off. I'm also going to work on cutting my discretionary spending down and putting more of the at towards my ccs.

You're looking at it wrong. Knowing your timeline helps further my statement that you need to stop saving for the wedding until the CCs are paid. You get married next September. If you were to put away $715 for the 10 months you have until then you would have $7,150 and you'd still have $3,770 in CC debt looming over your head (not including interest accrued between now and then). If you put the wedding savings, debt payments and efund toward the debt for 4 months and put $1215 (the total of the wedding savings and CC payments) in savings once your debt is paid, at the end of your remaining 6 months to save you will have $7290 and no CC debt. You will end with more money. Look at the bigger picture.

But if you didn't actually want suggestions on how to reach your goals faster and you just wanted to know whether you should withdraw from your 401(k) then the answer is no and I'll just leave it at that.

ETA I did my math wrong, you'd have $1269 in debt left, but regardless, same outcome.

[BuckyBadger]

I worry about one thing that is missing from your budget, though -- where is your current retirement savings? Or is the $3600 a month AFTER contributing to a 401k? Are you missing out on a match? If you don't have access to a 401k you should ABSOLUTELY be setting aside $420 a month and putting it into a ROTH IRA. Your fiance should, too.

You should be contributing at least something... And once you have your debt cleared up and your wedding paid for, start hitting that retirement HARD.

[disneysteve]

Originally Posted by BuckyBadger

I worry about one thing that is missing from your budget, though -- where is your current retirement savings?

Re-read the first post:

contributing 10% of my base pay with a match of 4% of my total salary.

[BuckyBadger]

Originally Posted by disneysteve

Re-read the first post:

Gotcha. I thought that was his old 401k. I didn't read closely enough to see that he has one with his current employer.

My bad :-)

Starting a ROTH as soon as they can still wouldn't be a bad idea, though!

[disneysteve]

Originally Posted by BuckyBadger

Starting a ROTH as soon as they can still wouldn't be a bad idea, though!

Agreed. Standard advice is to fund the 401k just enough to get the full match, then fund the Roth up to the max, then go back to the 401k.

[JoshuaHeckathorn]

Originally Posted by hohlernr

I've already signed up for a 0% balance transfer cc to hopefully rid myself of the interest payments and by the time the promotional period ends, I should have the credit cards payed off. I'm also going to work on cutting my discretionary spending down and putting more of the at towards my ccs.

Keep in mind that while I think utilizing a 0% balance transfer is a smart idea in your situation, it can have a negative effect on your credit scores if you're not careful. You may not care if you're not planning to rely on your credit scores anytime soon, but it's still worth thinking about. I know that after I got married I relied on my FICO scores for a lot of different things.

Just pay close attention to what credit limit you're offered and how much credit card debt you're transferring. For example, if you're offered an $8,000 credit limit and you transfer $6,000 to the new card, your credit utilization on that card will be 75% and your overall credit utilization should increase as well. That's going to really hurt your FICO scores.

Ideally, you want to keep your CU ratio on any particular card (or overall) at 10% or less. Once you bump above 30% you can expect it to have a pretty significant negative effect on your scores.

[hohlernr]

First, I want to say thanks for all the advice! I am extremely impressed with the helpfulness of everyone on this site!

Originally Posted by disneysteve

Agreed. Standard advice is to fund the 401k just enough to get the full match, then fund the Roth up to the max, then go back to the 401k.

My 401k is a Roth 401k. Should I continue funding this at my current rate, or should I put enough to get my full match and then start a roth IRA? Forgive me if this is a stupid idea/question, but I really don't know too much about 401ks and IRA. What is your advice?