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Using 401k to pay of my credit card debt

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Money Talk > Credit & Loans

Should I use my 401k to pay off my debt?
Use 401K?
36%
 36%  [ 4 ]
Just try to pay it off slowly?
63%
 63%  [ 7 ]
Total Votes : 11

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CHIJD
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Using 401k to pay of my credit card debt  Reply with quote  

I have about 18K in Credit Card debt (average rate around 18%) that I have slowly paid off over the years (it used to be higher). However, I am considering using my 401k from my old job (which has about 21K) to just pay off it off. My thought process is by paying this off, I can actually save more and put more away. I would still have my current's job 401k with about 5K and could increase what I put into it if I don't have to pay so much in credit card bills. I barely putting anything in it now.

I understand that I will have a 10% penalty and pay taxes (Last year i was about a 15 or 16% tax bracket) .

I could continue to just pay it off slowly but feel like I am never going to get ahead doing this.
Post Wed Sep 05, 2012 3:25 am
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coaster
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In another thread about using savings to pay off a car loan, I brought up (and favored) the psychological point of view. This is a case where the psychological point of view needs to be swept under the carpet and just consider the dollars and cents. Which way are you going to be ahead in dollars and cents:

1) use the 401(k) to pay off the loan, pay the taxes and penalties, and lose the future growth while you start over (and I'll bet you didn't factor that in) vs. the interest paid on the debt, less the growth you get from the added cash flow providing you save all the freed up cash flow (and I'll bet you didn't figure that, either, and the compounding on that starts from zero)

2) keep the 401(k), continue paying off the debt as you are doing, and remember your interest paid declines as the balance declines, so to make the numbers comparison valid, you have to take the slowly increasing cash flow from the smaller interest paid and put it toward the savings.

Why am I suggesting you make your decision solely on the dollars and cents? Because I sense from your post so far your "thought process" has been based solely on your feelings about the situation, not the facts. Run the numbers and generate some facts, then make your decision.

BTW, I don't know how much you're paying on your credit card debt now, so I can't run the numbers for you. I did run them using a fictious amount, and some equally fictitious assumptions, so I have a pretty good idea what the answer might be. But hey, that'd be telling. Laughing

and the result might be surprising ...

... and something you might want to get in the habit of doing, anyway, when faced with financial decisions. Numbers don't pay attention to "gut feel"

~Tim~
Post Wed Sep 05, 2012 6:13 am
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CHIJD
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Thank you for your response. I don't know the exact numbers but I pay around 6 to 7K a year in paying of the debt. I know that will decrease; however, in whipping out that debt, it frees up that 6 to 7K that i can save, contribute to a 401k, traditional IRA, etc.

I guess the biggest factor is how much am I losing in terms of future earnings from keeping the 401k or is that mitigated with the increase cash flow.
Post Wed Sep 05, 2012 1:53 pm
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oldguy
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If you keep your $21,000 and leave it in the Market where the traditional retun is 11%/yr, it will be $480,000 in 30 years. If you cash out your $21,000 you'll net about $15,000 after Fed, State, & Penalty.

At 18%, you are currently paying about $2700/yr in interest to keep that $15,000 on loan form th ecc companies - that is probably a fair price to pay for keep that $480,000 on track for you future wealth. Especially since it will be only for a couple years.

quote:
I would still have my current's job 401k with about 5K and could increase what I put into it


This is something that you may want to give priority to - people tend to put it off because they always seem to have more immediate bills. But if you have $417/m auto-deposited in your 401k (so that you never see it) that is about a Million in 30 years (at 11%/yr). Plus you get a $1000/yr tax refund from it. Plus you may have a 'match' in your 401k, that could easily push the million up to $1.5M. (The company that I worked for didn't have a match, but my 401k grew to a million fairly fast, way less than 30 yrs - I'm always surprised to learn that other workers don't sign up, take it seriously.)
Post Wed Sep 05, 2012 2:39 pm
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CHIJD
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Thank you for your response. More things to think about it. My company does match (around 5%). I am only putting in about 1% right now due to trying to pay off the CC bills.

In the event, I would whip out majority of my CC debt, I would increase that %.
Post Wed Sep 05, 2012 4:00 pm
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oldguy
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quote:
I am only putting in about 1% right now due to trying to pay off the CC bills


The match on that 5% is an instant 100% return on investment - so you definitely want to pay 18% to borrow the money to get 100% - a no brainer?

But keep the 401k - actually, you should roll it from your old company into an IRA at a fund company such as Vanguard or Fidelity.

Do you have any assets - cars, house? If so, you can use them for collateral to get a low interest loan - and use the cash to pay off the 18% loan.
Post Thu Sep 06, 2012 12:43 am
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coaster
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quote:
Originally posted by CHIJD
I don't know the exact numbers ....

quote:
Originally posted by CHIJD
.... More things to think about it. .


No, STOP "thinking about it".

oldguy gave you an example of how you can come up with actual numbers on which to make a decision, so you don't have to think about it, you simply do whatever the numbers tell you is the best choice.

Now, get out that tablet, pen, and calculator ... that's all you really need if you're not spreadsheet-savvy ... and start whipping up some real numbers of your own, and to do that, you need to know your starting point, so ..., saying:
quote:
Originally posted by CHIJD
I don't know the exact numbers ....



... well, that's just not going to cut it.

KNOW those numbers.


Now, best wishes and good luck. Smile

~Tim~
Post Thu Sep 06, 2012 6:14 am
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DanielS
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Using 401(k) to pay off credit card  Reply with quote  

If you rollover into a self-directed Solo 401(k), then you can take out up to a $50,000 loan without any restrictions or tax penalties. That way you can pay off the debt, and then slowly repay your 401(k) at a much lower interest rate. (All of which, of course, goes to your retirement profits .) Very Happy
Post Thu Sep 13, 2012 7:38 pm
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TermLifeInsuranceForSmoke
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Re: Using 401(k) to pay off credit card  Reply with quote  

quote:
Originally posted by DanielS
If you rollover into a self-directed Solo 401(k), then you can take out up to a $50,000 loan without any restrictions or tax penalties. That way you can pay off the debt, and then slowly repay your 401(k) at a much lower interest rate. (All of which, of course, goes to your retirement profits .) Very Happy


Tha'ts a great tip!!!
Post Mon Sep 24, 2012 8:49 pm
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