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Started SEP accnt, cash out unhealthy 401k to pay off debt?

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crashtestdummy
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Started SEP accnt, cash out unhealthy 401k to pay off debt?  Reply with quote  

I have a good amount of high interest credit card debt that needs to be taken care of. I'm paying roughly 300/month in interest alone, and it's killing me, not to mention my fiance is a stay at home mom and has a good bit as well we are paying on. I'm looking for a little help on deciding if I should cash out my 401k. It was started many years ago, however I was laid off and there have been no contributions to it for a long time. It sits right now at $14,000 & hasn't grown much over the years, maybe 7-8% per year. The only reason that I'm even considering cashing it out is that I now have a very stable job where I have a SEP account setup. My employer contributes $7,000-11,000 each year. (currently a balance of $9,600). My logic is that the interest we pay outweighs the 401k growth.... we are paying $4,200-$4,800/year in interest, using the 401k cashout of about $9,500 to pay off debt would drop our yearly interest payments to about $2,200/year. This would save us about $2,200/year which could go toward the rest of the debt, and not have all that wasted on interest, and be better off overall. Could someone please let me know some of their thoughts, I'm an idiot when it comes to these thing, which would explain my financial situation, but I'm trying to dig my way out of it.
Thanks!
Post Wed Mar 18, 2015 1:11 pm
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oldguy
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It appears that you owe about $20,000 and are paying 20% or more in interest?

1. One thing to try is transferring balances to cheaper cc's - we get quite a few zero interest cc offers in the mail, maybe you do to?

2. Cars. Another issue that is common among young folks is cars. The rationale is usually 'I need safe reliable transportation' to go to work, take the kids to the doc, yada. And that always gets translated to a "new" car. Eg, people look only at the payment - "yeah, $400/m is good". But the new $25000 car becomes a $5000 car in about 5 years, where does that $20,000 come from? So if you & DF have a couple late-model cars, that is a good place to look - sell them and buy a pair of reliable affordable cars. (In fact, the book 'The Millionaire Next Door' points out that most millionaires drive older cars). Most folks don't realize that it costs about $18,000/yr to keep a pair of late-model cars - and you must earn about $22,000 gross to have the $18,000 net to pay for cars.

3. Sell. You must have bought a lot of stuff with that $20,000, is there anything that you could sell to raise some money?

quote:
It sits right now at $14,000 & hasn't grown much over the years, maybe 7-8% per year.


4. Actually, 7-8%/yr isn't bad, by the Rule of 72, it is doubling every 9 years - ie, $28,000 in 9 yr, $56,000 in 18 yr, $112,000 in 27 yr - that's how wealth is built. And, as a single guy, the tax hit is pretty big, 28% for Fed, 10% penalty, maybe 4% for State. So it will cost almost $6000 to cash it out early (the rules purposely steer you toward holding it until past 59 1/2.)

I would exhaust 1,2,& 3 first - and then break into the $14,000 if you have to - you might split it into two years so that you stay in a lower tax bracket.
Post Wed Mar 18, 2015 3:44 pm
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