401k vs credit card debt

idahodave · #21 04/11/11, 04:02 PM

Don't forget taxes on the withdrawal.....probably lose about 25%...or more depending on your tax bracket. So if you get $75 cash you will have to repay $100.

Bit off point...by accident, you're asking about a loan not a withdrawal
sorry Dave

Jena · #22 04/11/11, 04:19 PM

If you left the company, you do not have to come up with the cash to repay the loan. They just deduct it from what is left in your 401K.

Michael W. Smith · #23 04/11/11, 04:36 PM

Well . . . . . it all depends on what your 401(k) is earning now. Is it invested in safe investments (bonds / cash) or is it in stocks?

If it's in safe investments earning 3% and your credit card interest rate is 25% - it would look to be best to pay off the credit card - but wait a minute!

If you would lose your job before you finish paying off the loan, whatever you still owe is going to penalized at 10% for withdrawing it before age 62. Once you are not working any loan amount has to be paid back immediately or it will be considered a withdrawal. In addition to the 10% early withdrawal, that amount will now be considered income for the year this happens - so taxes will be owed on that money at tax time. This scenario doesn't seem like a great deal now does it?

Scenario # 2 is if your 401(k) is totally invested in stocks, you have no idea if over the next 3 or 4 years your money will be earning 10% or -10%. It's all a gamble, but the same thing applies as above if you lose your job before paying off the loan - 10% penalty for early withdraw, and the amount owed is taxable income.

Another question is, does your employer match your contributions, and if so, how much? If they match your $1.00 with 10 cents, you are already "earning" 10% on your money invested.

I would say the best bet is to QUIT CHARGING ANYTHING ON YOUR CREDIT CARD, live as frugally as possible and pay off the debt ASAP. You also need to keep contributing to your 401(k) - A. Especially if your company matches and B. You are running out of time to save your nest egg.

Reptyle · #24 04/11/11, 04:44 PM

Quote:

Originally Posted by Michael W. Smith

Well . . . . . it all depends on what your 401(k) is earning now. Is it invested in safe investments (bonds / cash) or is it in stocks?

If it's in safe investments earning 3% and your credit card interest rate is 25% - it would look to be best to pay off the credit card - but wait a minute!

If you would lose your job before you finish paying off the loan, whatever you still owe is going to penalized at 10% for withdrawing it before age 62. Once you are not working any loan amount has to be paid back immediately or it will be considered a withdrawal. In addition to the 10% early withdrawal, that amount will now be considered income for the year this happens - so taxes will be owed on that money at tax time. This scenario doesn't seem like a great deal now does it?

Scenario # 2 is if your 401(k) is totally invested in stocks, you have no idea if over the next 3 or 4 years your money will be earning 10% or -10%. It's all a gamble, but the same thing applies as above if you lose your job before paying off the loan - 10% penalty for early withdraw, and the amount owed is taxable income.

Another question is, does your employer match your contributions, and if so, how much? If they match your $1.00 with 10 cents, you are already "earning" 10% on your money invested.

I would say the best bet is to QUIT CHARGING ANYTHING ON YOUR CREDIT CARD, live as frugally as possible and pay off the debt ASAP. You also need to keep contributing to your 401(k) - A. Especially if your company matches and B. You are running out of time to save your nest egg.

If he withdraws distributes the money before age 59 1/2 the 10% penalty applies...at 62 he'd be fine.

Once the employer contributions are deposited into the account, then they are already considered part of the balance, so his loan won't affect that...he's earning 10% because of his contributions...In theory, if the portfolio isn't performing well, he could be losing money on the balance, which would include his and employer contributions.

TRAILRIDER · #25 04/11/11, 04:53 PM

Quote:

Originally Posted by Fat Charlie

Taking a loan from your 401k is the right move. You'll be paying a lower interest rate on the debt, and you'll be paying that interest to yourself anyway. Income tax on the loan repayment money is irrelevant- you've paid income tax on the money you're mailing to the CC company too.

I agree. A coworker just did this very thing. He was paying out more to the cc co than he would be repaying his 401k. But that all depends on how much is in the 401k etc. (And my coworker stopped using the cc's too.) And the bigger question is: Will you continue to make contributions to your 401k while you are repaying? Because if you don't, your 401k won't be growing at the same rate. But hey, its still a personal decision. Personally, I won't touch my 401k, yes, I did entertain the idea one time. But I decided against it.

TheMartianChick · #26 04/11/11, 07:35 PM

Our retirement accounts are doing quite well right now. I would would not take money out of them right now. I see this as what might be the last attempt to make up for lost time. When the market crashed in 2008, we lost around 45% of the value. Since that time, we have gotten it back and then some...This doesn't include the contributions that we've made since the crash. Npe...the market is doing right by us right now. Hubby plans to retire at 56 in 3 years.

**clovis** · #27 04/11/11, 07:46 PM

I wouldn't touch that 401k in a million years.

Buckle down, live on rice and beans, and get those CC's paid off.

I am a huge fan of Dave Ramsey...it works...I promise you that.

http://www.daveramsey.com

Use Less · #28 04/12/11, 08:41 AM

I would not borrow on my 401K. What other avenues do you have for paying off your debt? Tighten your belt. Look for ways to pay less for what you need. Buy less of what you want. Do you have ways of raising bits of money? For instance, sell off items you no longer use, or take a second job. Last year, I took in about $1000 from excess produce from my garden, and I also tutor music students. I use a credit card that pays 5% back on specific shopping categories & organize my purchases to meet its' calendar & limits; I always pay my cards off. Sue PS I retired at just under 56.