Use of Refinance and liquidating 403b for debt reduction

[Doc8406]

I currently have 30k in credit card debt at 10.5% APR I'm considering greatly reducing this debt to be more manageable by.... 1. Refinancing VA home loan taking advantage of a .5% reduction of APR to 3.75% X 30 Years. By matching the loan to my current home value, I can reduce the CC debt by $17000. 2. I also have $10000 in a 403b with my current employer. I understand by removing it early I'll take a hit on taxes and fee. Guessing I'll be left with $7000 or so. In the end I'd hope to have a more manageable $6000 on the cc. Does this sound like a wise move considering the situation? Thanks in advance

[HundredK]

If you decide to go the 403b route, be sure to check with your employer to see if you can take a loan out. With 401k's, you can do that at a very low interest rate, and then you essentially pay yourself back. No tax consequences.

[disneysteve]

I currently have 30k in credit card debt at 10.5% APR
I also have $10000 in a 403b with my current employer. I understand by removing it early I'll take a hit on taxes and fee.

DO NOT touch your retirement plan. Just forget that option even exists. It's a truly awful idea. You will pay a 10% penalty and income tax on the money. So you will be paying up to 35% to get that money so you can pay off a 10.5% debt. It makes absolutely no sense to do that.

If you decide to go the 403b route, be sure to check with your employer to see if you can take a loan out.
No tax consequences.

Everyone should also forget that a loan option exists from their 401k/403b. That's also a truly awful idea.
There are absolutely tax consequences to those loans. You take out money that was put in pre-tax but you have to replace it with post-tax dollars. Then when you retire, that money gets taxed a second time which defeats the whole point of the plan in the first place which is to shelter money from taxes.

Refinancing might make sense. We'd need more info to say for sure. But leave the retirement money alone. It will cost you more to take it out than you will save in interest.

If you'd like more detailed advice, posting more details about your situation would be very helpful.

[HundredK]

DO NOT touch your retirement plan. Just forget that option even exists. It's a truly awful idea. You will pay a 10% penalty and income tax on the money. So you will be paying up to 35% to get that money so you can pay off a 10.5% debt. It makes absolutely no sense to do that.

Everyone should also forget that a loan option exists from their 401k/403b. That's also a truly awful idea.
There are absolutely tax consequences to those loans. You take out money that was put in pre-tax but you have to replace it with post-tax dollars. Then when you retire, that money gets taxed a second time which defeats the whole point of the plan in the first place which is to shelter money from taxes.

Refinancing might make sense. We'd need more info to say for sure. But leave the retirement money alone. It will cost you more to take it out than you will save in interest.

If you'd like more detailed advice, posting more details about your situation would be very helpful.

What I meant is that there are no tax penalties.

As far as it being paid with post tax dollars - well yeah, the higher interest rate cc is also being paid off with post tax dollars. That's how that works in either scenario.

What is true is that the money pulled out of 403b won't be invested and earning you more $$. And there's the possibility that the loan might be used to pay down the card and then the card gets charged up again.

So I wasn't implying it's a great idea, especially for such a small amount of money. But there are, in fact, no tax penalties.

[disneysteve]

So I wasn't implying it's a great idea, especially for such a small amount of money. But there are, in fact, no tax penalties.

There is no immediate tax penalty as there is with the early withdrawal. The tax penalty comes later when those dollars are subject to double taxation. I guess I view that as a penalty in a way.

[HundredK]

There is no immediate tax penalty as there is with the early withdrawal. The tax penalty comes later when those dollars are subject to double taxation. I guess I view that as a penalty in a way.

I'm really trying to follow that line of thinking, but I'm still not seeing how this has any additional tax consequences than just paying off the credit card (or transferring the cc balance to a lower rate cc). If looking at it this way:
1. money goes in the 403b tax free,
2. loan is taken with no tax penalty
3. loan is repaid with after tax dollars just as it would be if paying off the balance to the cc company except you pay yourself interest,
4. when you get old, dollars are taken out and taxed just as they would be otherwise.

But you do lose out on some earnings while repaying the loan. But that's not a tax penalty, and you're losing out on potential earnings anyway while repaying any debt.

[GoodSteward]

I've never thought of that Steve. That's very true. You are basically replcaing the pretax money with post tax money that you will pay taxes on again later. It's a technically that might come out in the wash on smaller amounts, but overall borrowing against it is a terrible idea. You are removing the shares you own. When you pay it back it goes back at the current price of shares (could be higher) meaning you are left with less amount of stock even though the cash looks the same. I believe that is right because the one time I borrowed a small amount it removed the cash from my account, not just gave a loan against it.

As far as the OP goes, I"m not a fan of refinancing a house to pay off credit cards. What you are doing is just borrowing against time to reduce the payment, not the debt. If you refinance to a fix time that is on par with your plans to pay off the cards it's closer. but usually people throw the debt into a 20-30 payoff. That is like paying your credit card off in 20-30 years at that rate. You are paying far more interest over time even though the rate may appear smaller. Also, refinancing and withdrawing money requires more equity and will up the interest. Being a VA loan they are a lot more forgiving on the requriements, but I think it still stands you cant just borrow the money the same as a normal refi, espeically if you are too close to the value of the property. I have a retired airforce friend who thought he was going to cash in on his equity from an offer he got, and it turned out they didn't have enough equity to do that.

It's hard to advise here without more information on why you are needing to do this. If you are simply trying to move debt to a lower interest, it won't work out as good as it looks over all. It would be helpful to know more info here such as are you still using the cards? Do you have a savings? How is your cash flow? meaning do you need more monthly cash flow to avoid a drastic situation like bankruptcy or just want to reduce the interest? Absorbing a debt into a mortgage is worse in the long run, but can help if you are in a bad spot and really need to free up cash flow.

[TexasHusker]

I would use the 403b money. You're going to pay income tax on it sooner or later - the only thing extra is your $1000 early withdrawal penalty. 10 percent interest on $10K is $1000 - so you're either paying $1000 penalty to the IRS, or $1000 in finance charges. Get the debt knocked down.

[GoodSteward]

Also, I dido Steve on the 403B . That was my frist reaction. Forget that idea. Compounding interest relies on time and it will either work for you or against you. If you odn't have money earning, it is working aaginst you. Not to mention you odn't want to be in the habit of borrowing against retirement. Just leave that alone.

If it is possible I sugggest leaving things alone, refinancing only if you can reduce interest AND reduce time. It can completley undo the little bit of interest savings by adding in closing cost and stretching the loan back out(depending on how far into the loan you are). When I finally refinanced after 6 years I reduced the rate almost 2$ AND cut off 9 years from the fixed payoff. I refused to go out to a 30yr even with a lower rate. That would have just flushed all my effort down the drain.

I know you can say you can treat a 30yr like a 15 but the people who follow through with that are in the single digits percentage.

[GoodSteward]

I would use the 403b money. You're going to pay income tax on it sooner or later - the only thing extra is your $1000 early withdrawal penalty. 10 percent interest on $10K is $1000 - so you're either paying $1000 penalty to the IRS, or $1000 in finance charges. Get the debt knocked down.

If this is with the current employeer can he even withdraw it and not borrow it? I know 401ks are locked in until you quit or get fired, but I'm not sure about 403Bs.

[HundredK]

I've never thought of that Steve. That's very true. You are basically replcaing the pretax money with post tax money that you will pay taxes on again later.

I still disagree. There is no tax penalty.

[disneysteve]

There is another issue with the 401k/403b loan. It will become payable immediately if you leave the job for any reason. If you don't/can't repay it, it gets reclassified as an early withdrawal and then you get hit with that penalty.

Regardless of the tax issue, it just isn't worth doing. There is definitely a 10% penalty. Your credit card debt is at 10.5%. So you are paying 10% to borrow money to use to pay off a 10.5% debt. There's just really nothing to be saved in that process, especially when you factor in the opportunity loss of not having those dollars invested all of that time.

[HundredK]

Regardless of the tax issue, it just isn't worth doing. There is definitely a 10% penalty. Your credit card debt is at 10.5%. So you are paying 10% to borrow money to use to pay off a 10.5% debt. There's just really nothing to be saved in that process, especially when you factor in the opportunity loss of not having those dollars invested all of that time.

I do agree with this statement.

[GoodSteward]

I still disagree. There is no tax penalty.

I found a top 10 list from CNBC about why you shouldn't borrow. Number 9 is exactly what steve said.

http://www.cnbc.com/2014/09/08/top-10-reasons-you-should-never-borrow-from-your-401k-plan.html

"You'll incur double taxation. Loans from your 401(k) actually cause you to pay taxes twice. Why? Because you're repaying with after-tax money and then later, when you withdraw the funds in retirement, you'll pay taxes on that same money again."

[HundredK]

I found a top 10 list from CNBC about why you shouldn't borrow. Number 9 is exactly what steve said.

http://www.cnbc.com/2014/09/08/top-10-reasons-you-should-never-borrow-from-your-401k-plan.html

"You'll incur double taxation. Loans from your 401(k) actually cause you to pay taxes twice. Why? Because you're repaying with after-tax money and then later, when you withdraw the funds in retirement, you'll pay taxes on that same money again."

But if you would be repaying another debt off with after tax money anyhow, there is no difference. I also never said that the OP should borrow, I have no disagreement there. There just simply is not a tax penalty.