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Investing/Strategies / Retirement Investing
|Subject: Re: pension vs credit card debt? please help||Date: 1/29/2000 4:23 PM|
|Author: BGPenhollo||Number: 18435 of 81981|
"I have about $ 9,500 (100% vested) in my previous employers pension plan.
I have about $ 10,000 in credit card loans at 4% apr.
My question is
(1) should I take out the pension money and finish up up credit card debt.
(2) If I take out the money how much (approximate percentage) would I lose in penalties and taxes (filing jointly, annual gross income- $ 80,000)"
The second question first...
If you are younger than 59 1/2, you will pay a 10% penalty on top of oridnary income tax. I don't know the tax rate tables but I'll guess you are at or below 28%. You will lose 28% of $9,500 or $2,660 to income tax and another 10% of $9,500 ($950) to penalty. So out of the $9,500, you will have $5,890 (or 62% of your investment.)
The 1st question second..
First, please check your Credit card because you will probably find that the 4% is a teaser rate and will balloon after 3, 6, or 9 months. Check your bill and it will show the rate you are paying. If you are truly paying 4% apr, the monthly rate should be 4%/12 or 0.333%/month. Whatever is listed as your monthly interest rate, multiply it by 12 to get an annual rate.
Most cards will be around 18%. If you are paying an 18% rate, you will need to make payments of $293.75/month to pay this off in 4 years. This means you can not add to the debt and if you do, your payment will need to much higher because holding a balance causes any new charges to begin interest charges immediately. You only get the 20-25 day no interest charges if your balance is zero.
I look at using spare money where it will give me the best return on average. I would think that your money left in the 401K will earn more than 4% annually. It would be risky to think your 401K will return more than 18% over the long haul. The one thing I'd look at is that if I took the money now, I'd lose 38% so I think when I leave the 401K alone instead of using it to pay off debt, that's a 38% adder to the 401K left untouched during the 4 years it takes to pay off the debt.
There is no wrong answer. What works for me may not work for you.
Hope this helps..
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