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    401k To Pay Off Debt?

    Hi everyone,

    I just recently started a new job and have a 401k with my old employer.

    I'm only 23 and never had a 401k prior.

    My vested amount is only about $2,200.

    I have 2 credit cards that I would like to make payments towards to help defer paying these high interest fees.

    Credit Card #1: $1,200 Balance @ 17.90%
    Credit Card #2: $1,900 Balance @ 17.99%

    I understand there is a penalty and taxes if I decide to withdrawal (I believe 10% penalty + state & federal taxes)

    What would the best option be? Withdrawal, rollover (then take a loan?), or something else?

    If I withdrawal, should I just put it all towards one card or split between the two?

    I do not have much take home after my mortgage, car payment, bills, etc to put a dent in the CC debt.

    If there is anymore information I can provide, please let me know.

    Thank you very much in advance!

    #2
    Welcome.

    The best option is to make your retirement savings be for retirement, not for cleaning up other messes. Roll the old 401k into an IRA.

    How should you pay off the credit cards? You should slash your spending to the bare minimum you need to survive until they are paid off. If you can post your income and expenses, we can help you do that. $3,100 is not very much debt (though the interest rates are lousy). It's hard to say for sure without more info, but paying off that amount should be pretty doable even on a modest income. The one thing that concerns me is your mention of a car payment but when you post your numbers, we'll see if that's where the problem lies.

    And by the way, just totally wipe out of your mind the fact that it is even possible to take a loan from a 401k. NEVER, NEVER go that route. Just keep repeating this to yourself: Retirement accounts are for retirement. Retirement accounts are for retirement....
    Steve

    * Despite the high cost of living, it remains very popular.
    * Why should I pay for my daughter's education when she already knows everything?
    * There are no shortcuts to anywhere worth going.

    Comment


      #3
      You would be better served by trimming expenses, and/or picking up additional part time work to pay down your cards than you would cashing out your 401K.
      Brian

      Comment


        #4
        Think of it this way:

        Taking the money from your 401k will result in ordinary taxes, plus a 10% penalty. So you would in effect pay 25% to 35% whereas your CC's only have a 17.9% and 17.99% rate. Borrowing from the 401k will actually cost you more money than paying a full year of interest.

        I would do what you should have done to begin with: get on a budget, keep spending manageable, and pay off the debt with your income. As as DS stated, imagine that borrowing from the 401k is not an option.

        The only way that borrowing from a 401k should be considered is in order to avoid bankruptcy. And with $3,100 in CC debt, bankruptcy is not a concern.
        Check out my new website at www.payczech.com !

        Comment


          #5
          Originally posted by bjl584 View Post
          You would be better served by trimming expenses, and/or picking up additional part time work to pay down your cards than you would cashing out your 401K.
          Also, do you have anything you can sell? Take a look in the Frugal section of this site for more ideas on cutting expenses.

          Comment


            #6
            Originally posted by tapout View Post
            What would the best option be? Withdrawal, rollover (then take a loan?), or something else?
            Best option for the old 401k is to roll it over to the new plan, or to an IRA - and then keep it invested.

            You should also contribute whatever amount your new company will match, no more, no less -- until after the CCs are paid off.
            If I withdrawal, should I just put it all towards one card or split between the two?
            You should not withdrawal from the old plan.

            I do not have much take home after my mortgage, car payment, bills, etc to put a dent in the CC debt.

            If there is anymore information I can provide, please let me know.
            Yes, could you please post a full budget for review? What is your income? What expenses do you have each month?

            If you post every dollar you spend, we can do even more help than solve $3k of CC debt.


            Other things that would help us put you in a better financial position:
            -What other savings do you have? What's the checking account look like? Savings account? Stock trading accounts?
            -What do you owe on your home? At what interest rate? How much is the home worth if you sold it in today's market?
            -What is your car worth if you sold it in today's market? How much do you still owe on it and at what interest rate?
            -Do you have any school loans? Are you going to school? Finished?
            -What sort of retirement planning have you done, if any?

            Comment


              #7
              There is no easy way to leap to financial fix without a plan. We're offering advice in an attempt to prevent you from making a difficult situation worse. You can create a plan which will allow you to pay-off those credit card balances and with a bit of discipline get the best bang for your bucks.

              Comment


                #8
                Forbidden Fruit

                all of the replies you hahe recieved so far are 100% correct, the same advice was just passed on to me (i was wondering the same thing, pay off debt w/ 401k). these guys/gals helped me realize that it is a very very bad idea. thanks to all for that!

                Comment


                  #9
                  I would agree to not cash out a 401K. To big of penalties, etc... I did find a reason that made sense (at least for me) to use a 401K loan recently though and I have ALWAYS been anti-401k loan. I was moved by my company to a new city and was purchasing a home. My company would buy my current house at the 3 month mark. We found a great deal on a home and didn't want to lose the opportunity to purchase this new house. We were fronted a certain percent of equity in our current home based on the relo companies appraisal but it was not enough to cover the down payment. However, we didn't want to pull out money from investments that we have outside of our 401k's. We would have had tax implications for selling these stocks. It was better to take the loan from the 401K for 2 months and then pay it back.

                  Comment


                    #10
                    Don't take the easy way out

                    You have been given a gift, and that gift is time. If you made $27,000 a year and rolled that $2200 into your new 401k and continued to invest at the same rate, you would have almost 2 Million by the age of 65. If you cash that money out you start at zero, also, you get hit with around 30% in penalties. Also, you will get paid more as you work longer (typically) so the amount you contribute to your 401k would grow over time. Finally, you should feel the pain of getting out of credit card debt. Then, you will avoid it like the plague. Sadly, I was never told this and am currently getting out of credit card debt. Luckily, I am young enough to rebound from this. But, you're even younger. Don't squander the gift of time. Go to google and check out retirement calculators.Good Luck!

                    Comment


                      #11
                      Unless they have changed the rules (I haven't worked in over 10 years and may have lost track of some of the rules regarding 401Ks) but if you roll it over to your new company and then pull it out of your new company, it isn't free money. You pay the taxes that were mentioned, but you also have to make monthly payments to your new 401K until it is all paid back as you are actually taking out a loan, AND if you quit or lose the job before it is all paid back, it is instantly due and payable in full to your new 401K.

                      You are young. Roll that money over and let it slowly turn into major retirement money with the help of compounding. One of the things I try to do with bills even when things are tight is round up the amount owed to the nearest dollar or $5 and when things start getting easier then the nearest $10 and whatever extra. I know it doesn't sound like much, but when paying off my student loans and rounded the amount owed up to the nearest $5 I paid them off several months early. I'm talking about the amount owed is $43.37, pay $45. That $1.63 isn't going to kill you financially (and if is would you really need some help from the folks here!) but it can give that little psychological boost of knowing you are paying more than the minimum and it really does make a difference as you watch the balance disappear over the course of the next few months. When things are easier boost it to $50 and then $60 and then one day you realize it is gone. The best way to make this work is keep those credit cards in your pocket, in the desk at home, etc. donít use them.

                      If you are single and only have a 40 hour work week, then get yourself a PT second job; even if it is flipping burgers and have all the money go onto paying down your debt and getting some savings built up. Anyone questions you about the extra job; tell them flat out you are working to build up your financial future now while compound interest can do the most work and encourage them to do the same.
                      Gailete
                      http://www.MoonwishesSewingandCrafts.com

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