Empty out 401k to pay Credit Cards

**maat55** · 05-24-2010, 07:06 PM

No. Do not use the 401k. You will loose roughly 40% in taxes and penalties. Just focus your other funds(bonuses and other) on the debt.

**nmboone** · 05-24-2010, 07:18 PM

I honestly think it would be a mistake. I don't see any valid excuse for doing this except that you want to have more money to have fun on weekends. Really? Cashing out a 401k for weekends?

I think your bonuses (if they are a sure thing) could go towards your debt. I also really do think this will be something you may regret in the future. You can pay this off the old fashioned way without losing money on retirement. Cashing out a 401k is for when you are on the street IMO.

**jpg7n16** · 05-24-2010, 07:53 PM

Agreed. Do not cash it out. See posts above.

You can however, stop contributing to the 401k until the credit card is paid off. That may be a smart idea for your situation. (depending on company match, cc interest rate, etc.)

But all in all - if you're single and make $55k (not including bonuses), as long as you're not in too high of a cost of living area, you should be able to pay this all off in 1 year or less with your bonuses. You can still pay off this debt quickly and enjoy your weekends. You're likely spending too much.

**AssetManagement** · 05-25-2010, 05:46 AM

I currently contribute 6% (which is the highest amount my company will match 100%). My average weighted interest rate right now is 10.5% and will only increase when an introductory rate expires on one card in September.

I work in NYC so unfortunately the cost of living is extremely high.

Should I stop contributing to my 401k? I know to most of you emptying out the 401 seems like the easy route (and it is), but I will also be contributing to it for the next 30+ years. It's not like I'm a few years away from retiring (or that I'm even going to stop contributing into it). For me, even despite the large penalties, having the peace of mind of being totally debt free goes a long way.

**jpg7n16** · 05-25-2010, 06:38 AM

In that case, I would not stop the 401k contributions either.

The expected return for the stock market is somewhere 7-11%. Each dollar you contribute to your 401k (because of the matching) becomes $2 of assets generating 7-11% each. So a $1 contribution generates an expected 14-22%. While the debt only costs 10.5%. Plus you save on current taxes, and your money is instantly doubled. (A credit card balance at 10.5% would take about 6.5-7 years to double)

You've got a good deal going with the company you're at right now.

My suggestion would then be to review the rest of your budget to see about lowering expenses in other areas to free up cash for debt repayment.

I understand your desire to be debt free, but there are other/better ways to acheive that goal rather than by cashing out a 401k.

**disneysteve** · 05-25-2010, 06:39 AM

Originally posted by AssetManagement View Post

Should I stop contributing to my 401k?

NO! You've got a plan to be debt-free in less than 3 years. Stick with that plan. Cashing out the 401k or stopping contributions to it will cost you thousands in lost earnings. It is totally not worth it. Forget about it. Keep contributing to get the full company match. Keep living as far below your means as possible. Pay off your debt and 3 years from now, you will be in great shape.

**AssetManagement** · 05-25-2010, 07:23 AM

Originally posted by jpg7n16 View Post

In that case, I would not stop the 401k contributions either.

The expected return for the stock market is somewhere 7-11%. Each dollar you contribute to your 401k (because of the matching) becomes $2 of assets generating 7-11% each. So a $1 contribution generates an expected 14-22%. While the debt only costs 10.5%. Plus you save on current taxes, and your money is instantly doubled. (A credit card balance at 10.5% would take about 6.5-7 years to double)

I really want to believe this. Unfortunately, I'm having a hard time with those numbers. If I got back from when I was 12 (1998) until now, the DIJA has returned an average of 3%. a 1,000 401k would now be worth (as of 5/22/2010) 1,124.09 while a 1,000 credit card debt (at my average interest) would be 3,661.93.

Date DIJA % increase 401k Credit Card
1/1/1998 8,800 1,000.00 1,000.00
1/1/1999 9,786 11.20% 1,112.05 1,105.00
1/1/2000 10,922 11.61% 1,241.14 1,221.03
1/1/2001 9,879 -9.55% 1,122.61 1,349.23
1/1/2002 10,403 5.30% 1,182.16 1,490.90
1/1/2003 7,992 -23.18% 908.18 1,647.45
1/1/2004 10,357 29.59% 1,176.93 1,820.43
1/1/2005 10,506 1.44% 1,193.86 2,011.57
1/1/2006 11,109 5.74% 1,262.39 2,222.79
1/1/2007 12,354 11.21% 1,403.86 2,456.18
1/1/2008 12,262 -0.74% 1,393.41 2,714.08
1/1/2009 7,609 -37.95% 864.66 2,999.06
1/1/2010 10,856 42.67% 1,233.64 3,313.96
5/25/2010 9,892 -8.88% 1,124.09 3,661.93
Average Return 2.96%

Despite what is told to us, I find it hard to believe I am going to get a 7-11% return (averaged annually) on my 401k. Who is to say the high growth of the 90's wasn't an anomaly? What about 65-85 when the DIJA was pretty much flat for 20 years?

I understand the importance of a 401k and saving for retirement. but for me to expect that type of return is unrealistic. For me to expect 10.5% on my CC, with a big increase in September, that is realistic.

**jpg7n16** · 05-25-2010, 07:53 AM

Originally posted by AssetManagement View Post

I really want to believe this. Unfortunately, I'm having a hard time with those numbers. If I got back from when I was 12 (1998) until now, the DIJA has returned an average of 3%. a 1,000 401k would now be worth (as of 5/22/2010) 1,124.09 while a 1,000 credit card debt (at my average interest) would be 3,661.93.

Date DIJA % increase 401k Credit Card
1/1/1998 8,800 1,000.00 1,000.00
1/1/1999 9,786 11.20% 1,112.05 1,105.00
1/1/2000 10,922 11.61% 1,241.14 1,221.03
1/1/2001 9,879 -9.55% 1,122.61 1,349.23
1/1/2002 10,403 5.30% 1,182.16 1,490.90
1/1/2003 7,992 -23.18% 908.18 1,647.45
1/1/2004 10,357 29.59% 1,176.93 1,820.43
1/1/2005 10,506 1.44% 1,193.86 2,011.57
1/1/2006 11,109 5.74% 1,262.39 2,222.79
1/1/2007 12,354 11.21% 1,403.86 2,456.18
1/1/2008 12,262 -0.74% 1,393.41 2,714.08
1/1/2009 7,609 -37.95% 864.66 2,999.06
1/1/2010 10,856 42.67% 1,233.64 3,313.96
5/25/2010 9,892 -8.88% 1,124.09 3,661.93
Average Return 2.96%

Despite what is told to us, I find it hard to believe I am going to get a 7-11% return (averaged annually) on my 401k. Who is to say the high growth of the 90's wasn't an anomaly? What about 65-85 when the DIJA was pretty much flat for 20 years?

I understand the importance of a 401k and saving for retirement. but for me to expect that type of return is unrealistic. For me to expect 10.5% on my CC, with a big increase in September, that is realistic.

You do realize that your entire graph is skewed because of one year right? 2008 was a bad year - yes. But the shorter time span you look over, the wider your numbers will fluctuate.

You've ignored all the years since inception until 12 years ago. Plus you've ignored dividends.

If I take from my birthday (4-28-85) until my b-day in 2008, the DOW went from 1300, to over 12000. That's almost a 10-fold growth in 23 years. (10.15% return w/o dividends)

And then in one year, the DOW dropped substantially to 8076 (4-24-2009), which since my birthday is still a return of 8.265% (w/o dividends)

It all depends on when you choose to start ignoring the numbers.

This site (S&P 500 Rolling Period Total Real Returns | AllFinancialMatters) has some interesting graphs at the bottom. You'll notice that there have been no 20 year periods with negative returns in the history of the stock market.

If you're invested for the long term, then look at the long term returns. So say you've got 35 years to go till retirement, then look at the average return for the past 35 years. You'll get a much clearer picture.

**jpg7n16** · 05-25-2010, 08:01 AM

But I think I see what's really going on here: you're not looking for good advice. You're looking for someone - even just one person - who will tell that it's okay for you to cash this 401k out to knock out the credit cards.

You're not looking for a smart answer, you're looking for the answer you want.

And in your mind you are choosing to only look at certain information from certain periods of time that support your decision while ignoring other info and other periods of time that show your idea to be a bad one.

I understand what you're looking for, and I see why you want it - but I'm just not going to tell you that this method of accomplishing that goal is okay.

**disneysteve** · 05-25-2010, 08:45 AM

Originally posted by AssetManagement View Post

Despite what is told to us, I find it hard to believe I am going to get a 7-11% return (averaged annually) on my 401k.

Here is a list of funds that I own and their average annual return since inception. Keep in mind that means these numbers include the past few years when the market bottomed out.

VFINX 10.6%
VGHCX 16.63%
VBMFX 6.85%
CSRSX 12.38%
HRTVX 12.93%
OPGIX 11.69%
OPGXS 9.58%
JANDX 12.50%

I have been in some of these funds for as long as 18 years. I am a long-term investor. I plan to be in some of these funds for at least another 20 years. The only fund on that list under 9% is a bond fund so that's to be expected. The best fund on this list was up over 70% in 2009. Over the long haul - not 5 or 10 years - nothing beats stocks.

**disneysteve** · 05-25-2010, 08:53 AM

Originally posted by AssetManagement View Post

I currently contribute 6% (which is the highest amount my company will match 100%).

Should I stop contributing to my 401k?

I missed this earlier. You have a 100% match. That means you are earning an instant and guaranteed 100% return on your money. What is the rate on your credit cards? I'm guessing it is not more than 30% and probably less than that. I believe the average rate is 18%.
If you stop contributing to your 401k, you are passing up a 100% return in order to save 18% (or whatever your rate is). If you cash out your 401k, you are paying a roughly 40% penalty to save 18%. No matter how you slice it, the numbers will NEVER favor cashing out or stopping contributions to the 401k.

**MonkeyMama** · 05-25-2010, 03:46 PM

I have to jump on the no bandwagon.

It makes no sense whatsoever to take out that money - it will be so heavily penalized.

I would have less issue with stopping contributions (since it doesn't carry a huge penalty with it), but still have plenty issue with giving up a match. In your case, doesn't make any sense.

Your argument kind of works against you. If stock market returns are not as high as preached, then you need to save MORE to retire some day.

I am not a fan of debt, by ANY means, but $12k in credit card debt, to get through college, that can be paid off in 2.5 years, just doesn't seem like something worth throwing away retirement money for. (Plus, with bonuses, you can certainly pay it off faster, it sounds).

If I was that upset about it, I'd get a second job. Work some extra, just until the debt is paid. Now, that makes sense.

**snafu** · 05-25-2010, 06:02 PM

You're smart enough to complete a university degree and hired @ $55K with a bonus in this tough market but seem focussed on weekend fun. I too think you should have fun but find things to do that are free or nearly so and concentrate on clearing CC debt.

At 24, you've years of fun ahead. Don't be penny wise and pound foolish by leaving matching dollars on the table. Since you've joined and asked for advice...I challenge you to act in your own best interest!

**jaine** · 05-28-2010, 04:15 PM

I'm jumping on the "no" bandwagon too. Early withdrawal penalty is too high. 7k isn't 7k anymore after paying income taxes and early withdrawal penalty on it. And it sounds like you wouldn't be "debt free" after emptying out the 401k - you would be in debt to Uncle Sam playing catchup on your taxes.
So if you empty out the 401k you would basically just be moving debt from one place to another, in a very expensive way.

I would definitely not recommend lowering the 401k contributions - because of the company match.

Empty out 401k to pay Credit Cards