| Help! 401K or pay off debt?? |
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kenny6543
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| Help! 401K or pay off debt?? |
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Here's my dilemma:
I am 31 years old. I recently left a job and will be starting a new one next week. In my 401K at my old job, I have about $110,000. I have the option now to move it or take it in cash with the additional 10% penalty tax. My wife and I currently have $70,000 in debt outside of our mortgage (credit cards, 2nd mortgage). My wife's idea is to take the 401K in cash and pay off all debt and start the 401k over at the new job. That would free up over $1600/month we are currently paying. I can invest the max into the new 401k, and then start up a Roth IRA for her (she is self employed and has nothing set up currently).
What do you think??
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Thu Apr 05, 2007 2:29 pm |
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kenny6543
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quote:
Originally posted by coaster
The two best things people have going for them in a retirement account are time and tax-deferral. You're giving them both up, plus the penalty, if you cash in your 401(k). I wouldn't do it except in extremis; say you needed the money for a heart transplant or something.
Thanks for the reply!!
We figure if the debt were gone, the funds could be replenished quite rapidly because I can max out what I can contribute and also open a Roth IRA. As it is now, we can barely pay down the debt and are limited to how much we can contribute to the IRA, much less open a Roth. I am sill on the young side (31), and eliminating $1600/month in bills would help considerably.
Or do you think struggling for at least the next 8-10 years to pay it down and leave the IRA would be worth it in the end?
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Thu Apr 05, 2007 9:16 pm |
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kenny6543
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quote:
Originally posted by coaster
Well, by my calculation, you pay it off in under four years; or maybe the number you quoted is principal only and I didn't figure in the interest?
Remember....you're giving up your gains to date as well as paying tax and penalty if you cash out the 401(k). But on the other hand, there is something to be said of the positive psychological impact of paying off debt.
What I said is just my gut talking; I didn't run the numbers. Are you spreadsheet-literate? Running these scenarios in a spreadsheet and looking at the actual numbers is really the best way of making a decision.
I think the REAL decision-maker is whether you'll really put all that free cash flow back into your retirement plans. Most people, when they find that much discretionary money available, find other things they think they "need" to spend it on. 
Yes, the 1600/month is mostly interest. That's why it would take quite a bit longer to pay off. We had a major home repair that killed us and my wife was off work for quite a while. Yes, I'm spreadsheet literate and I've been crunching numbers for a few days now. Half of me says to take care of the debt and start over, but the other half doesn't want to see a $0 balance in the 401K after all these years! I'm looking for non-biased opinions on what to do. Thanks again for all your input!
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Fri Apr 06, 2007 12:21 am |
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oldguy
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kenny, a couple things -
1. The $110,000 will be about $3M when you are age 60 if you never add another dime. And it will be about $6M when you are age 66. All you have to do to make that happen is keep your hands off of it. IMO, don't give up that second $3M just to pay off a short-term $70k CC.
2. The $110k won't pay off your $70k loan anyway - the fed tax will be about $31k, state tax about $6k, and the penalty is $11k. That leaves only $62,000.
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Fri Apr 06, 2007 2:51 am |
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zulu113
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Hi Kenny. I'm the same age as you, and a year ago was in a similar situation (25k debt, mostly credit). I wrestled with the same question, and I ultimately decided against it. My wife and I cut our spending dramatically, put together a plan for digging out, and went at it. We weren't down to eating ramen or anything dramatic like that, but we quit eating out several times a week, quit the Starbucks in the morning, that sort of thing. We also raised alot of money simply selling stuff on eBay. We cleared the last of our debt last month.
My advice is to leave that money where it is. Make some lifestyle changes, start pinching pennies even more than you are now. Start working your way down the high interest debt. It's slow going at first, but the more you clear the more you have available for other debts. Believe me, the last 5k is nothing compared to the first 5k, but you have to start somewhere. Don't take the easy way out today at the sake of screwing yourself tomorrow.
Best of luck,
Zulu
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Fri Apr 06, 2007 2:45 pm |
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kenny6543
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quote:
Originally posted by oldguy
kenny, a couple things -
1. The $110,000 will be about $3M when you are age 60 if you never add another dime. And it will be about $6M when you are age 66. All you have to do to make that happen is keep your hands off of it. IMO, don't give up that second $3M just to pay off a short-term $70k CC.
2. The $110k won't pay off your $70k loan anyway - the fed tax will be about $31k, state tax about $6k, and the penalty is $11k. That leaves only $62,000.
Thanks! Would the difference be that great if I start over now but can commit the max to the IRA and add a Roth with contributing the max to that too?
If I chose to leave the $110,000 in the IRA, I will be making minimal contributions to it over the next 10 years until the debt is gone.
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Fri Apr 06, 2007 3:07 pm |
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kenny6543
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quote:
Originally posted by zulu113
Hi Kenny. I'm the same age as you, and a year ago was in a similar situation (25k debt, mostly credit). I wrestled with the same question, and I ultimately decided against it. My wife and I cut our spending dramatically, put together a plan for digging out, and went at it. We weren't down to eating ramen or anything dramatic like that, but we quit eating out several times a week, quit the Starbucks in the morning, that sort of thing. We also raised alot of money simply selling stuff on eBay. We cleared the last of our debt last month.
My advice is to leave that money where it is. Make some lifestyle changes, start pinching pennies even more than you are now. Start working your way down the high interest debt. It's slow going at first, but the more you clear the more you have available for other debts. Believe me, the last 5k is nothing compared to the first 5k, but you have to start somewhere. Don't take the easy way out today at the sake of screwing yourself tomorrow.
Best of luck,
Zulu
Thanks!! We made that commitment almost a year ago and haven't added to the debt since, but there is barely a dent made to it  and it is quite frustrating and over-whelming to deal with. I've read the Dave Ramsey books and it seemed like his thought would be to cash in the 401 and get rid of the debt. Or am I making a wrong assumption?
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Fri Apr 06, 2007 3:10 pm |
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zulu113
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I've listened to Dave a few times, and for the most part he makes sense. His 'beans and rice' approach is ultimately a lifestyle change approach to the problem. I've never heard him favor cashing out a retirement account, though I don't listen alot and I've never heard say the opposite either. For what it's worth, my approach was to make the minimum contribution to my 401k while still meeting the company match (5% in my case), and putting the rest into the debt.
I'm curious how you get your 10 year payoff timeframe though. I make the following SWAGs: 50k credit debt at 21%, 25k mortgage at 8%.
At 1600/month, it should take 5 years to payoff the 50k and an additional year to payoff the 25k.
Scrape up another 100/month? 4 years 5 months for the 50k, 1 year after for the 25k.
Scrape up another 200/month? 4 years for the 50k, 1 year after for the 25k.
Granted I make alot of assumptions without knowing any details, but this should be in the ballpark.
hope this helps, and in any case, wish you both good luck,
Zulu
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Fri Apr 06, 2007 4:02 pm |
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oldguy
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quote:
I've read the Dave Ramsey books and it seemed like his thought would be to cash in the 401 and get rid of the debt. Or am I making a wrong assumption?
You made the right assumption based on the DR book. His thesis is directed at the consumer debt junky - all CC, car, and HELOC debts - then his methods apply - ie, 'debt-free' is the big goal. Conversely, if you use debt as a tool to accumulate wealth, 'debt-free' is not a goal, high Net Worth is the goal. I am high NW, I can pay cash for the houses that I own, but I keep mortgages and I use my money to make money.
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Fri Apr 06, 2007 4:09 pm |
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kenny6543
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quote:
Originally posted by oldguy
quote:
I've read the Dave Ramsey books and it seemed like his thought would be to cash in the 401 and get rid of the debt. Or am I making a wrong assumption?
You made the right assumption based on the DR book. His thesis is directed at the consumer debt junky - all CC, car, and HELOC debts - then his methods apply - ie, 'debt-free' is the big goal. Conversely, if you use debt as a tool to accumulate wealth, 'debt-free' is not a goal, high Net Worth is the goal. I am high NW, I can pay cash for the houses that I own, but I keep mortgages and I use my money to make money.
Is there any finance books, websites, or plans you recommend?
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Fri Apr 06, 2007 5:56 pm |
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bdtfinancial
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| Kenny, Do you have any home equity left? How's your credit? |
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Another great option if you have any available equity is to use the Money Merge Account from U1st Financial. You would be able to get a new Heloc and pay off your 2nd (if there is enough equity). Then pay off most of your credit card debt and elimiinate those payments. By using the HELOC as your primary checking, you will cancel most all of the interest and won't make hardly any payment on that HELOC...again freeing up more money monthly.
My kids were in a similar situation and paid off ALL of their credit card debt and will have the HELOC and their mortgage paid off in under 10 years. Plus with the software, they now know exactly where they stand and have a financial dashboard.
This approach will allow you to keep that 401 and avoid all of those penalties, not to mention the real loss of that 401 k money over time.
It's certainly worth exploring, and they will do an analysis for you at no cost.
[deleted]
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Sat Apr 07, 2007 6:39 pm |
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oldguy
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kenny - Here are some useful books, most public libraries have them. The Millionaire Next Door, The Automatic Millionaire, The Four Pillars of Investing by Berstein, Greed is Good by Jonathon Hoenig.
Be careful of the Money Merge Accounts, they take your paycheck, dump it in a Variable Rate revolving account, and you run all of your expenses thru it. Popular in Australia, Europe, etc, where ARMs and other 'designer' loans are outlawed. It prepays your loan if you pay lots of extra money into it (no magic, no free lunch). Conversely, you can run up a bill that is higher than the house and the ARM can jump to 10% or 12% and you will lose the whole mess. In other words, if you wanted to prepay your mortgage there are way better ways. If you google it, you will see the word 'smake-oil" mentioned, lol.
But do you have any equity in the house?
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Sat Apr 07, 2007 11:40 pm |
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kenny6543
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quote:
Originally posted by oldguy
kenny - Here are some useful books, most public libraries have them. The Millionaire Next Door, The Automatic Millionaire, The Four Pillars of Investing by Berstein, Greed is Good by Jonathon Hoenig.
Be careful of the Money Merge Accounts, they take your paycheck, dump it in a Variable Rate revolving account, and you run all of your expenses thru it. Popular in Australia, Europe, etc, where ARMs and other 'designer' loans are outlawed. It prepays your loan if you pay lots of extra money into it (no magic, no free lunch). Conversely, you can run up a bill that is higher than the house and the ARM can jump to 10% or 12% and you will lose the whole mess. In other words, if you wanted to prepay your mortgage there are way better ways. If you google it, you will see the word 'smake-oil" mentioned, lol.
But do you have any equity in the house?
Thanks, I'll check those out. Not much equity I'm afraid. 1st mortgage is at $130,000 and the 2nd is at $45,000 The value of the house is around $200,000.
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Sun Apr 08, 2007 2:21 am |
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bdtfinancial
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| MMA Accounts |
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It's amazing to me that people offer so many opinions on the MMA Accounts without understanding how they actually work. I have the MMA, as do my children.
We will pay off our mortgages, all credit cards, and the HELOC in under 10 years. It works! It isn't magic, it's just math. The software is your financial dashboard and ensures that you keep the balance on the HELOC down. It won't prompt you to send money on the mortgage until the higher interest HELOC balance is reduced. But you do always have the cushion of the HELOC if some financial crisis occurs.
The software keeps track of my spending habits and is programmed to know exactly when I get paid, and how much. It simply utilizes every single dime that I make instead of letting it set there in my checking account for days before my bills come due. I certainly wasn't fully utilizing my money when I was doing that.
Can you do something similar on your own. You bet you could, but would you. If you send an extra $500 on your mortgage, you no longer have that money if you need it - that is scary. Also, once you send it, do you know what affect you actually made on your mortgage? On a $200,000 mortgage at 6%, a $5000 payment on the principal saves you $23,000 in interest!
I know exactly where I stand at all times! I know the balance of the HELOC, the Mortgage, and have already paid my credit cards in full. I know exactly when my bills are due, and how much extra there is daily. I can use the HELOC if I need it for anything, but don't pay anything on it if I don't use it. My paychecks offset the interest, and I'm gaining on my mortgage daily. I'm saving over $50 per day in interest and will save over $179,000!
Get all the facts on the MMA Accounts before you decide. Knowledge is power!
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Sun Apr 08, 2007 12:50 pm |
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bdtfinancial
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| Kenny, your equity is probably enough to make it work! |
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You wouldn't pay off all the credit cards of course, but you can begin the process and have everything paid off before you know it! - and you can keep that 401k. You CAN have your cake and eat it to!
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Sun Apr 08, 2007 12:52 pm |
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