Started new job.. Just checking some thigns

[spectre686]

Hello All,


I found out with a 457 when you leave a job you can withdraw with no penalty only paying normal income taxes.

I have about 46000 in 457b and I have a 32,000 student loan.
Does it make any sense to pay off this student loan?

If I paid this off I would put more into retirement every paycheck I'm thinking about 10% to make up for the loss. I will start making 65000 next year. I'm currently 30 years old so I have at least 30 years before retirement.

My household income without the retirement money would be like $90,000. If did withdraw the money to pay off student loan it would push me to something like $120,000+
So I"m guessing we would have to pay an extra 9,000 or so in taxes..

Thanks for any advice.

[disneysteve]

It almost never makes sense to cash out a retirement account. The exceptions are to avoid something catastrophic like bankruptcy or a foreclosure. Short of that, retirement money should be used for retirement - period. That's why you put it there.

Think of it this way. If you leave that $46,000 alone and never add another penny, get an annual return of 7%, and retire at age 65, you'll have $529,000.

[spectre686]

It almost never makes sense to cash out a retirement account. The exceptions are to avoid something catastrophic like bankruptcy or a foreclosure. Short of that, retirement money should be used for retirement - period. That's why you put it there.

Think of it this way. If you leave that $46,000 alone and never add another penny, get an annual return of 7%, and retire at age 65, you'll have $529,000.

Ok I figured as much but wanted to make sure it was the way to go.

Wasn't sure because interest rates on student loans are like 6.00% and 7% return is very generous estimate on returns for retirement according to everything I have been reading.

[JustBill]

You didn't indicate whether this was a government 457b plan. It is possible that 457b funds invested through a nongovernmental employer can be surrendered to the employer's creditors, and you could be out the funds in the event of an extreme lawsuit or business failure.

If there is any doubt your former employer will be around in 30+ years when you require retirement funds, I would continue to consider the matter. Should you decide to move forward with liquidation, since we are at the end of a tax year, and the beginning of a new one, I suggest you invest time completing faux tax returns with a tax software to see how X amount withdrawn across the two years will impact your tax liability in 2013 & 2014. Avoid pushing yourself into higher than necessary brackets in either year.

You also likely discovered that 457 money cannot be rolled into any other tax deferred investment such as an IRA. Bottom line in my mind is, if you can liquidate the 457 and pay an effective federal tax rate of around 10% at this point in your life, kill off the 6-7% loans, crank your 401k to 15% and leave it, then this may be a rare event where it will make sense to touch retirement funds. Now, if you were 55, not a chance.

[Dvoll]

My 2 cents. DON'T cash it out. I know it seems like it feels good to eliminate the debt for peace of mind but also consider that if you did that, how long would it take through regular 401k/457 contributions to get back to that 46K.

I don't know when you started putting money in it but If I had to guess probably when you were 24/25? maybe sooner. So you could be in your mid 30's before you get back to where you are now and compounding interest makes a bigger difference in investments rather than SL.

Hopefully you get one time bonuses or just pay double your payment each month if you want to accelerate the pay off.

I was 23 when I started working FT I'm 32 now, paid off 42K in SL when I was 30 but always tried to max out 401k each year no matter what.

SL debt sucks, but I just think you should take extra income you make each month to chip away, don't try to knock it out with a silver bullet. You'll regret it 10 years later.

[disneysteve]

Wasn't sure because interest rates on student loans are like 6.00% and 7% return is very generous estimate on returns for retirement according to everything I have been reading.

You're going to pay thousands in taxes to access this money. Does it make sense to pay 25% income tax in order to save 6% interest?

I'm not sure what you mean when you say that 7% is a generous return for retirement accounts. I don't know what you've been reading but the long term average return of the market is a lot better than 7%. Heck, the short term return is way better. Most of my funds year to date are up between 15 and 30%.

[spectre686]

You're going to pay thousands in taxes to access this money. Does it make sense to pay 25% income tax in order to save 6% interest?

I'm not sure what you mean when you say that 7% is a generous return for retirement accounts. I don't know what you've been reading but the long term average return of the market is a lot better than 7%. Heck, the short term return is way better. Most of my funds year to date are up between 15 and 30%.

As far as the returns on retirement go I found 3 or 4 articles (CNBC, Reuters,CBSNews) that says 3-6% are more realistic numbers (Sorry can't post links yet until 15 posts!)


I do understand what you are saying about the taxes though.
I'm probably going to just leave it alone or roll it to my new 401k. Just try to pay off the student loan quicker.
Only reason I considered it was because I could contribute more to my 401k without the $350 a month Student loan payment. So that would reduce my AGI in the years that it takes me to pay off the student loan allowing me to pay less taxes in those years.

[disneysteve]

As far as the returns on retirement go I found 3 or 4 articles (CNBC, Reuters,CBSNews) that says 3-6% are more realistic numbers

If the market only returns 3%/year over the next 35 years, we're all going to be in a lot of trouble. That would be wildly unprecedented and I certainly don't believe the contrarians and conspiracy theorists who are proposing that.

[Petunia 100]

As far as the returns on retirement go I found 3 or 4 articles (CNBC, Reuters,CBSNews) that says 3-6% are more realistic numbers (Sorry can't post links yet until 15 posts!)

Do the articles say 3-6%, or 3-6% real? That is an important distinction. "Real" means after inflation.