Financial Advice???

[madurolover]

If there are any Financial Advisors on the forum (or just a financial guru) then I have a question for you.

Should I withdraw money from my 401k to pay down my credit card. The interest on the card is going to 19%, my balance is $6000 and I can only withdraw up to $5000 from 401k. Would the penalty on the withdrawal be more than the interest even over time?

This question is being posted for my girlfriend. If anyone could help it would be much appreciated. If anymore information is needed please let me know and I will respond back with it.

[Cypress]

Usually you borrow against your 401k. I know with mine there is a 50 buck origination loan fee plus the going interest rate for loans. These days you wont be making much on 401k i believe. IMHO it would be wise to do so and pay it off. However you still have the 1k to do so. Best bet is to get a personal loan for 1k if you can and try to get a lower interest rate. With it being fixed you are forced to pay down the money.

[Sweet_Cigars]

Well from what I know, when you take money from your 401k there is a penalty that you can put any money back in for a year plus that tax the hell out of it. So it would cost you more to pull out your 401k.

Retirement money is going to be "hard to come by" when it's time to retire. Atleast for me it will. I am 32 now. So with that said if by any means possible I would not mess with the 401k.

Now, if you don't have a choice and you need to pay off that card in order to save your credit from going bad than yes, do it. I don't have alot of financial experiences but thats just my opinion. I'm sure someone else wii be able to add in or correct me if I am wrong.

Good luck!

[Cypress]

Originally Posted by Sweet_Cigars

Well from what I know, when you take money from your 401k there is a penalty that you can put any money back in for a year plus that tax the hell out of it. So it would cost you more to pull out your 401k.

To clarify, are we withdrawing or borrowing against. I know with my 401k I can only borrow 50% of the net value.

[madurolover]

Originally Posted by Cypress

To clarify, are we withdrawing or borrowing against. I know with my 401k I can only borrow 50% of the net value.

I would imagine she is talking about a withdrawal. That is the way she posed the question at least. I will find out for sure when she calls at lunch time.

[themoneycollector]

I would not recommend taking out your 401k due to penalty and retirement saivngs.

If you can borrow against your 401k and pay yourself an interest that's lower or comparable to your current CC, then that would be a good option. Check with your 401k to see what the fees associated with borrowing against your 401k are.

Have you also looked at getting another CC and transferring the balance? The 19% rate is high and you can look into promo % offers that will give you a cushion of time to pay it off or at least look for a much lower % everyday card.

[madurolover]

Originally Posted by themoneycollector

I would not recommend taking out your 401k due to penalty and retirement saivngs.

If you can borrow against your 401k and pay yourself an interest that's lower or comparable to your current CC, then that would be a good option. Check with your 401k to see what the fees associated with borrowing against your 401k are.

Have you also looked at getting another CC and transferring the balance? The 19% rate is high and you can look into promo % offers that will give you a cushion of time to pay it off or at least look for a much lower % everyday card.

Like I said, the question is not for me (I deal in cash only ). I will let her read the thread when she gets home from work and maybe she can go from there.

Keep the advice coming guys!

[Bidiwalla]

Here are some cons of taking a loan from the 401K. My advice use it as a last resort.

1. You're losing interest. The net effect is that you have less money to invest and to earn interest. The money you borrow -- or take out -- of your retirement plan no longer appreciates in value from interest, dividends and/or capital gains in conjunction with the rest of your investment portfolio. Remember that you aren't really borrowing. All you are doing is using money from one account, such as your checking or savings account, to repay the money you borrowed from your 401(k). And when you take money out of that checking or savings account, that money loses interest, too.
2. It's not tax-sheltered money anymore. Whether you repay the 401(k) loan out of your salary or from a bank account, those payments are all made back into the 401(k) with after-tax dollars. So, let's say your monthly interest payment is $300 and you're in the 28% tax bracket. You'll have to make $416 in gross earnings to make the $300 payment. Then, when you retire and take withdrawals, you pay taxes yet again.
3. Unless you repay the loan, it is considered a premature distribution. You would owe federal and state income taxes as well as that 10% penalty if you are under age 59 1/2.
4. The loan isn't tax deductible. It's considered a consumer loan, so there is no tax advantage.
5. It affects your psychology toward retirement saving. If possible, your retirement money should sit untouched until you retire. It's too easy to get in the habit of dipping into your 401(k) instead of saving for things you need along the way. Keep your 401(k) in a loan free zone.

[contract]

If you are making a withdrawl, you get the penalty (commonly 10%) PLUS you have to pay taxes on the principle you withdrawl (assuming you made these contributions pretax. Add these toghether and assuming a 25% tax bracket, taking that money out will cost you 35%. Even if you took out 5K, you will only get your hands on $3250 after taxes to pay your CC.

On top of that, with the market so low, liquidating your shares at a depressed price will rob you of all the gains that should (hopefully) come over the next year. Your losing both ways.

My opinion is to concentrate on the behavior (cash only) and put every available dime to it till its gone.
I have a degree in finance. I am by no means an expert (please don't take this as expert advice), but we did go over things like this alot. 6k is doable, 25K is when you need to consider selling a kidney.

[Shervin]

Originally Posted by contract

If you are making a withdrawl, you get the penalty (commonly 10%) PLUS you have to pay taxes on the principle you withdrawl (assuming you made these contributions pretax. Add these toghether and assuming a 25% tax bracket, taking that money out will cost you 35%. Even if you took out 5K, you will only get your hands on $3250 after taxes to pay your CC.

On top of that, with the market so low, liquidating your shares at a depressed price will rob you of all the gains that should (hopefully) come over the next year. Your losing both ways.

My opinion is to concentrate on the behavior (cash only) and put every available dime to it till its gone.
I have a degree in finance. I am by no means an expert (please don't take this as expert advice), but we did go over things like this alot. 6k is doable, 25K is when you need to consider selling a kidney.

Ditto, I've been in Financial planning for a bit also and I second this notion: Concentrate on behavior (Cash Only) and work that balance down the good ol hard way, watching your nickels and dimes.

If anything you should dollar cost average as soon as that debt's outta the way by increasing the frequency and/or amount that's being contributed to that 401k, not a penny more than the company matches though, what's left over should go into a Roth IRA (depending on your income as their is a threshold where you're only eligible for a reduced contribution known as the phase-out limits.)

Dollar cost averaging makes much more sense than taking money OUT of your 401k. If you don't make enough to be able to accelerate principal payments on that card an option you can choose to exercise (if you have more than one card) is to eliminate them all together with a consolidation (personal, unsecured load at a fixed and lowered rate) The fee's and penalty's assoc. with an early withdrawal is a easy way out, and not recommend.

I am almost sure that you guys can go without something each month, eat out one less each month, tell her to skip the spa and to forget the mall for a while or anything that's applicable as I am assuming (she's your girlfriend, I'm sure you know her financial habits) It's not what you make, it's what you keep! Find the money to pay off that debt elsewhere but don't touch your 401k !

[wrapper23]

Call the CC and tell them to cancel the card. Don't make payments for 6 months. Change your phone number. If she has other cards they will raise the rate. Cancel them too.

Then call them back and say you want to settle. Tell them you are willing to pay X amount. That's all those debt consolidation scammers do anyway.

Her credit will take a hit but so what? The whole credit thing is a scam. They do whatever they want and get away with it. It's time to teach them a lesson.

I wouldn't touch my 401k.

[WWhermit]

Ruin your whole credit rating over a $6K credit card that you choose to default on? No thanks!! Anyways...

If she can pay it down and stay current, do that. Chances are the 401k she wants to take the money out of has lost a tremendous amount of value over the last 2 years (I'm currently down over 100k), so if she wants to take out $5000, it was probably worth close to $9000 a couple years ago. Best to keep it in and let it recover.

I like the comment about finding either a credit card or a personal loan with a lower interest rate to use for a balance transfer. If that isn't available, I would personally just pay it down, avoid any 401k fees/penalties/lost interest and move on from there.

WWhermit

[Jonesee]

Originally Posted by wrapper23

Call the CC and tell them to cancel the card. Don't make payments for 6 months. Change your phone number. If she has other cards they will raise the rate. Cancel them too.

Then call them back and say you want to settle. Tell them you are willing to pay X amount. That's all those debt consolidation scammers do anyway.

Her credit will take a hit but so what? The whole credit thing is a scam. They do whatever they want and get away with it. It's time to teach them a lesson.

I wouldn't touch my 401k.

No offense, but this is exactly what you don't want to do.

Here is why:

1. You aren't going to teach the credit card company anything at all.
2. Your delinquency stays on your credit report 7 years.
3. If you go 6 months without paying them, they will likely attempt to garnish your paycheck, (can you live on 20% of your regular pay?) or charge the balance off. Either action creates a derogatory in your bureau that will now last 10 years!!
4. Your credit history determines your credit score.
5. Your credit score determines what lenders will charge you in the future. The lower the credit score the higher the rate they will charge.
6. It will also determine whether you get the next house, or apartment or car.
7. More and more, employers are looking at credit bureaus as part of their selection process for new employees.
8. Insurers also utilize credit to determine insurance rates on your house and car. Poor cresit gets you a higher premium.


When looking at a lifetime, $6000 is not a lot of money. If she is active in her 401K plan she should be able to borow against it. Typically up to 50% of the value of the 401K fund. At least then she is paying herself back the interest and does not get hammered by the early withdrawal penalty.

[Cigary]

Gotta agree with not taking the money out for only this amount of credit card debt. You will lose a lot more in the long run. Dedicate herself to paying as much as she can on this debt,,,stop with the Starbucks and other fringe things we take for granted. IN a couple of years time she could actually pay this thing off .

[madurolover]

Originally Posted by contract

If you are making a withdrawl, you get the penalty (commonly 10%) PLUS you have to pay taxes on the principle you withdrawl (assuming you made these contributions pretax. Add these toghether and assuming a 25% tax bracket, taking that money out will cost you 35%. Even if you took out 5K, you will only get your hands on $3250 after taxes to pay your CC.

On top of that, with the market so low, liquidating your shares at a depressed price will rob you of all the gains that should (hopefully) come over the next year. Your losing both ways.

Thanks for all the response guys. The quoted post basically gave her all the info she was looking for.

She works in real estate (as admin in the commercial division of Coldwell Banker Chicora) and they took a 30% pay cut at the beginning of the year. Spending is at a bare minimum right now even for neccesities. I am sure that she will get the card paid off and she never misses a payment (usually pays a little more than the minimum every month).

Right now it is a struggle but she will make it through just fine.

Once again, thanks for all the responses.