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URL:  http://boards.fool.com/for-the-dont-touch-the-401k-crowd-do-the-math-25359041.aspx

Subject:  Re: Poll: 401K Roll it? Take it? Date:  4/3/2007  8:21 PM
Author:  aj485 Number:  56567 of 75383

For the don't touch the 401K crowd, do the math. At 24% interest rate on $13K is $260/month or $3120 in non-deductable interest, which probably what the minimum payments are. It would require roughly a $20K withdrawal to pay off the debt. The 20K left in an IRA would be fortunate to make $2000-$2500/year (10-12.5%) and quite possible much less.

Okay, I did the math. After 15 years (since the OP is 50 - assumes retirement at 65), he would still come out ahead to leave the money in an IRA earning 8% a year, while paying minimum payments on his CC debt at 24% a year.

What you are missing is that the CC balance will be decreasing, thus diminishing the amount of interest each year; while the IRA balance, through the power of compounding, will be increasing the interest earned each year.

Assumptions: OP can afford the current minimum monthly payment on the CC; minimum monthly payment is 2.5% of the balance, with a beginning balance of $13,000; OP makes minimum payment and no more (i.e. payment diminishes each month); interest rate is 24% (2% per month); IRA earns 8%, on average a year (0.66667% per month), with a beginning balance of $20,000.

After 15 years, here are the results:

Balance on CC: $5,273.47
Interest paid on CC: $30,906.01
Principal paid on CC: $7,726.53
Minimum monthly payment on CC after 15 years: $132.50

Balance in IRA: $66,138.34
Interest earned on IRA: $46,138.34

Net interest gain: $15,232.33
Net interest gain after 25% in income tax: $11,424.25

So even if the OP were to pay off the CC balance with the gain in interest after tax, he would still be ahead $6,150.78

Now if the OP were to have just kept making $325 payments each month, instead of making the diminishing minimum payments, he would have paid off the CC debt in 82 months (6 years, 10 months) and would have only paid $13,414.66 in interest, while gaining $14,487.04 in interest in the IRA during that 82 months, still coming out ahead by leaving the money in the IRA.

So, mathematically, he should still roll over the money into an IRA.

AJ
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