Help!I owe 80% of my gross income on credit cards! I CAN make my monthly payments but I have no breathing room beyond that. I was thinking of cashing in my 401k's to reduce my debt by 10k but that still leaves me owing 70%. I just bought a house this year so I am hoping for a good sized refund but am still panicking. This move (cashing in the 401k) would allow me to save $200 or so a month on credit card payments. Any ideas on whether this move is good or not would be appreciated.Thanks!!
What kinds of penalties would you have to pay for cashing in the 401k? It may not be such a good idea if you take a bigger hit from the penalties than you do from the interest on the credit cards. It also removes one source of money that you can access in case of hardship (disability, loss of job, etc.).I would personally leave cashing in retirement money as a last resort, to be done only when all other sources are exhausted and I couldn't make regular payments.
<<I owe 80% of my gross income on credit cards! I CAN make my monthly payments but I have no breathing room beyond that. I was thinking of cashing in my 401k's to reduce my debt by 10k but that still leaves me owing 70%. I just bought a house this year so I am hoping for a good sized refund but am still panicking. This move (cashing in the 401k) would allow me to save $200 or so a month on credit card payments. Any ideas on whether this move is good or not would be appreciated.>>I would not do that. It is trivial whether you start at 70% of 80%. What is inportant is that you learn to manage your finances. I'll use myself as an example in June of 1999 I owed 133% of my annual income. That is when I discovered TMF since then I have focused on eliminating my debt. Today i'm down to 42.3% it's been 17 months and i'm still at it. I would have been nice to eliminate it faster but It would not have meant as much to me, and I probably climbed back into the hole od debt. Just stay focused. You can do it.
It seems that there are messages in every folder and every newsgroup where I regularly participate people are asking about liquidating their 401(k).If you take an unqualified distribution out of your 401(k), the custodian will have to withhold 20%. You will be obligated to pay regular income tax plus 10% penalty when you file your federal income tax returns plus whatever income tax and penalty your state may impose. That 20% withholding will be "tax already paid" (just like income tax withheld from your paycheck, but on a different line on form 1040).If I tried to take an unqualified distribution from a retirement account, it would be 47% eaten in federal penalties (10%) and state (9%) and federal (28%) income tax, so that $10k would pay only $5.3k of debt. That makes 401(k) very expensive money to use for paying down the debt, and that isn't counting the loss of "compound growth" that the money in the 401(k) could have otherwise enjoyed.Then there is the issue that once the 401(k) is liquidated, if the deficit living hasn't been corrected, the debt will just go back up--one way or another one will have to stop living beyond one's means. There are a number of people on this board who can testify that they used retirement accounts or some other means to pay their credit card debt and just ran the balance back up, leaving them with just as much debt but now with fewer assets they could access next time. The key is to stop overspending, which usually includes making the credit card unavailable (putting it in a safe deposit box, or freezing it in a block of ice, or in some cases slicing it up into small pieces, whatever it takes to keep from adding charges to the card.
Raiding your retirement to pay off credit card debt is a bad idea for all the reasons you've been given-- taxes plus the fact that you haven't yet learned to budget effectively to cut out the overspending. It is a particularly bad idea now when markets have been down for several months and the assets in your 401K are worth less than they will be a few months down the line, when we have learned who the new President will be and that sort of thing. Hands off the retirement money! Setup your budget, quit charging, and go to work on that debt! Best wishes, Chris
I'm curious what that $80K on the credit cards purchased? Was it worth risking your retirement nest egg for?I'm awestruck that someone earning $100K a year has $80K on credit cards and $10K in a 401K. Please don't confuse this post as being critical. It isn't. Like I said I'm just awestruck.xtn
xtn, rest assured that no one is more saddened than me. :o( The bulk of the debt was incurred as a result of the purchase of the new house, the move across country and some other expenses.I appreciate everyone's comments and agree that the spending needs to be cut. Right now there is no spending allowed in the house and a budget has been established.In reflecting on my post I've realized that there are two issues here: first, the fact that I am not contributing enough to a savings plan of any kind and therefore living for today and not planning for tomorrow and second, that although sticking with my budget (which does not include any spending outside of necessities) can find me debt free in around 4 years, the real problem is that I don't want to wait until then -- i'd like to lessen the time to solvency. This impatience and the bad spending habits are behavioral issues that will need some serious work to change.Thanks again all. :o)
although sticking with my budget (which does not include any spending outside of necessities) can find me debt free in around 4 years, the real problem is that I don't want to wait until then -- i'd like to lessen the time to solvency. I think we can all sympathise with you here. It does seem like forever, and no fun in the meantime. But actually, as you start to see progress, it does become kind of fun. Track your debt on a spreadsheet, or in Quicken, and you can watch it come down every month. And the more it comes down, the more goes to principal instead of interest, so it is an accelerating process.One thing though - I think you need to have some little smidgin in your budget for fun. Otherwise it is too hard to stick to it. Then, as you meet your goals you can raise your smidgen a bit and enjoy your new found ability to buy a CD or have a latte with a friend.
If you take an unqualified distribution out of your 401(k), the custodian will have to withhold 20%. You will be obligated to pay regular income tax plus 10% penalty when you file your federal income tax returns plus whatever income tax and penalty your state may impose. That 20% withholding will be "tax already paid" (just like income tax withheld from your paycheck, but on a different line on form 1040).If I tried to take an unqualified distribution from a retirement account, it would be 47% eaten in federal penalties (10%) and state (9%) and federal (28%) income tax, so that $10k would pay only $5.3k of debt. That makes 401(k) very expensive money to use for paying down the debt, and that isn't counting the loss of "compound growth" that the money in the 401(k) could have otherwise enjoyed.Yes, but is it more expensive than the alternative?Those are interesting figures and I don't have any cause to argue with them, but they don't answer the question: Will the person better off in retirement-- in 5, ten, 20, or 30 years-- if he liquidates, and pays high interest debt? And, will he be better off today with the decreased debt burden?The usual quick answer mentality says: MAX OUT YER 401K! Never borrower from it! Never liquidate it! File bankruptcy only if you've suffered enough and can't possibly take it any more!Real numbers vs. fuzzy math. I'm only interested in the facts, not conventional "wisdom." I'll believe it if it is support by the arithmetic. It's like algebra in school: show your work.The original poster may have to provide more information. Is he still still there?
I'm a bit late chiming in on this,In reflecting on my post I've realized that there are two issues here: first, the fact that I am not contributing enough to a savings plan of any kind and therefore living for today and not planning for tomorrow and second, that although sticking with my budget (which does not include any spending outside of necessities) can find me debt free in around 4 years, the real problem is that I don't want to wait until then -- i'd like to lessen the time to solvency. This impatience and the bad spending habits are behavioral issues that will need some serious work to change.Learning this is probably one of the best financial lessons you'll ever learn. We hear from a lot of people who have run their cards up, taken a loan (either a Home Equity Loan or a 401(k) loan), then run the cards up again, and still don't understand what went wrong. Learning to control your spending habits, and learning patience, will put you on the path to permanent solvency a lot faster than any of the magic solutions other people look for.Welcome to Fooldom!Nancy
This move (cashing in the 401k) would allow me to save $200 or so a month on credit card payments. To me, this line says it all.Why not cash in the 401k and blow it on something truly frivolous? Sounds like you are planning on blowing $200 a month anyway, if you could.Don't cash the 401k in, and not just because it's a bad financial decision. It's time to face up to the fact that you have spent enough of tomorrow's earnings today. Live with a tight budget for a few months and understand what a millstone around your neck your spending habits have become. Then CHANGE them (actually, change them as soon as you understand what they are).There are many ways of downscaling your living expenses, and since you have just bought a house, you probably have good enough credit to get reasonable interest rates for balance transfers, etc. In short, it's quite possible that you can build a little 'breathing' room into your life, as is.foolwizard
...that although sticking with my budget (which does not include any spending outside of necessities) can find me debt free in around 4 years, the real problem is that I don't want to wait until then -- i'd like to lessen the time to solvency. This impatience and the bad spending habits are behavioral issues that will need some serious work to change.It's a good thing that you realize this. Debt free in four years is really a drop in the bucket compared to some pay-off plans! Remember, also, that many things can happen in four years that will enable you to become debt free sooner. Your income might rise or you might get bonuses or other windfalls; you might be able to make use of balance transfers to reduce interest rates to help you pay off faster; etc. Make your plan as though none of these things *will* happen, though - then it's gravy if they do.Learning patience is something we all need to do in order to become financially healthy. It takes patience to pay off debt, patience to save for retirement, patience to plan major purchases so that they don't come as major setbacks. The nice thing about paying off debt according to a carefully structured plan is that it teached you skills you need to build up savings and investments after the debts are gone.I concur with earlier posters who said that you do need to have a little wiggle room in your budget for fun and relaxation. You are respecting your future by planning to pay off debt, but you also need to respect your present - with appropriate indulgences, of course, not skiing trips to Switzerland. Condemning yourself to a grim, sparse existence for the next four years is not the way to go - it may lead to frustration and eventual cheating on your plan. If you need to take a *little* longer to pay off your debt because you are allowing yourself a little fun money, it's not the end of the world.Good LuckEditorialWe
Yes, but is it more expensive than the alternative?Unfortunately, I don't have the numbers so I can't run them through a calculator without making some major assumptions.Ignoring human factors for a moment, one is looking at an instant 47% loss (if using my numbers) as well as losing presumably 4 years of growth at maybe 10%/yr. In exchange, one is eliminating a chunk of debt and its interest. But it would really be instructional to get the actual balance, actual interest rate on the debt, the nature of the 401(k) investment (is it in the stock market, or something too conservative?), marginal tax rate, monthly amount being paid to the credit card, and then run the numbers both ways for 4 years. Also, once the debt is paid off, would the debt payments suddenly be sent to the 401(k) or would savings be abandoned?The human factors could be a different situation. The last question above could be too telling of human factors: if one works hard at eliminating debt but doesn't work on building up retirement investments, it would be better to keep hands off the retirement investments, no matter what the numbers would otherwise say. I suspect many humans will fall somewhere inbetween: work hard at eliminate the debt, but not work quite as hard at building up savings. This would be another unknown to factor in the math.
WHY IN THE WORLD did you purchase a house when you have such a high debt on the credit cards? Any fees/downpayment paid when you got the house would have made a good dent in the CC debt. There is NO CHOICE than to "bite the bullet" and start working yourself out. There are lots of appends about 2nd jobs, selling property, creating a budget, and a board on living below your means...JUST get started!
Y'all make excellent points. Thanks for the number crunching. I do remember a time when I paid my two credit cards off every month (course, that was also when you could count on a month or two of float from the merchant....sometimes 3 or 4). How many of you remember those days?My situation (and, yes, it does wear on me a bit...however, my Dad, who is a fine Fool, even agrees that what I am doing makes the best use of "my" money):1. Since I purchased my home in ~'89, I have accumulated ~$50K of unsecured debt (@9.9% to 10-3/8%) & ~$20K against my home (9%).2. I also have ~$250K in my IRA/403b accounts (assuming the market turns, this could increase to ~$400K).3. My home will be paid off in ~5 years (9%). It has increased in value by ~$40K.4. I am currently, and have always, contributed the maximum to my 401K's, and will continue to do so as long as I am allowed.In the spirit of this thread, I thought this might serve as justification for NOT withdrawing from your 401K or IRA.Yes, my debt is high, and it gets a bit tiresome. BUT, I cannot in good conscience, withdraw from my 401K to pay off the debt, for the reasons given previously in the thread.I take consolation in knowing that I have sacrificed being debt-free, so that I have always been able to max out my retirement. Is this reasonable, or am I fooling myself? Comments?--Randy
) as well as losing presumably 4 years of growth at maybe 10%/yr. ......it would be better to keep hands off the retirement investments, no matter what the numbers would otherwise sayExcept in todays market and the near term market where we will be lucky to show a gain. It is reasonably conceivable that one could lose money in the markets in a 401k in addition to paying interest to a credit card. In this case the numbers becomed skewed the other way.Do not always make the assumption that the market will grow. That may be the case for a 20 or 30 year span but not 4 or 5 years.
Unfortunately, I don't have the numbers so I can't run them through a calculator without making some major assumptions.Yes, too vague. If the poster is still here, perhaps they will fill in the blanks. If not, we could make the assumptions. These discussions are always broad enough, but never deep enough.Secondly, in lieu of another contribution to the retirement account (if they're still making them), I recommend an investment into a computer spreadsheet and a financial planning program like Quicken. Personal computers are extremely powerful tools, if used.
Except in todays market and the near term market where we will be lucky to show a gain. It is reasonably conceivable that one could lose money in the markets in a 401k in addition to paying interest to a credit card. In this case the numbers becomed skewed the other way.Yes, in the near term (e.g., less than 5 years, and especially since last March), you are right. However, because the market tends to be rather unpredictable in the short run, one really doesn't know which course of action is best until after the fact. Until then, one is stuck looking at the risk/reward tradeoffs and making the best assessment one can.Some expenses are rather predictable, such as tax and penalty for tapping into the 401(k) (but for exact numbers one needs to know more about a person's tax situation than is probably prudent for posting on a public board). Some expenses may change (e.g., credit card rates), as can some returns (the stock market being well-known, but to a lesser degree savings bonds rates and even the renewel rate of CDs have a certain amount of uncertainty).Do not always make the assumption that the market will grow. That may be the case for a 20 or 30 year span but not 4 or 5 years.On the other hand ....401(k) or 403(b), Roth IRA, conventional IRA, and other retirement accounts are, by their very nature, primarily long-term investments. Even if retirement is a short time away, most of that money will probably remain invested in the market, but probably with some of the portfolio moved to more conservative instruments (bonds, MMF, etc.).How does one compare a short-term action against long-term returns? I don't know (shy of having a working crystal ball or a copy of Grey's Sports Almanac that Doc Brown tossed out of his flying DeLorian). The approach I take for my personal life is to make sure I am covering short-term obligations, have a prudent amount of reserves that are not at risk, make sure I am not dependent on short-term market returns, and consdier probable long-term results of a course of action.Oh, for the want of a Flux Capacitor and 1.21GW of power! 8)
I take consolation in knowing that I have sacrificed being debt-free, so that I have always been able to max out my retirement. Is this reasonable, or am I fooling myself?(Click on the Subject line to see the message I am replying to--there are more details than I want to cut/paste.)I have been looking at your numbers, which in brief, are:Liabilities:$50K at around 10% interest in credit card debt$20K at 9% secured (tax deductable?)? at 9% in mortgage (tax deductable?, paid off in 5 years)Assets:$250K in Roth and 403(b)The house.My comments:Assuming long-term market returns of about 10.7%/yr for domestic large caps (1926-1998), which does not include any trading commissions or management costs, nor taxes, a stock-investing 403(b) and the credit card debt (neighborhood of 10%) are very close.However(1), many 403(b) custodians have high fees (investment advisory fees, M&E fees) that will eat into the returns, so that 10.7%/yr long-term annualized return on investment could easily look like 8.2% after expenses. (I just got out of a 403(b) provider that had 1.5% investment advisory fees for their large caps offerings plus 1.05% M&E, so I am not just making up those numbers.) On the other hand, there are a few 403(b) providers that are very good in controlling their expenses so that 10.7% could look like 10.4% (my new 403(b) custodian has an M&E fee of 0.005% and total expenses for their stock option of about 0.30% including their M&E fees). The assumption here is that the 403(b) money is invested in something that invests in stocks and not something more conservative like a bond fund, money market fund or a "guaranteed interest" account that over the long run is likely to produce far less returns than a diversified stock-based invesetment. Another assumpiton for comparison purposes is that over the long run the market will return near its historical average, though in the short run it may produce better or worse results.However(2), credit card companies are not too well known for keeping the interest rates managable. A number of people have complained that when their credit card balances got high, their credit card issuers raised the interest rates and would not lower them. (My suspicion is that the credit card companies justify this by considering someone who normally carries a very high balance as being at more risk and the credit card issuer wants to be compensated for taking on more risk, but the more skeptical of us suspect that some issuers figure they can get more interest and thus more profits once someone has such a high balance that they can't immedicately pay off the balance.) Also, a high credit card balance may count against you if you try to get another loan, such as maybe a mortgage for another house.However(3), assuming the best 403(b) and Roth IRA providers investing efficiently, one is still faced with market risk--the historic average does not guarantee returns from stock-based investments will get the neighborhood of 10% average annualized returns (after expenses) for the next 10 or 20 years. Generally one would like some "risk premium", that is, better expected returns for taking on more risk. In the numbers you posted, you could get a guaranteed return on investment by paying off the credit card debt that is about matched by the market risk of investing, even if it is in retirement accounts. In other words, you are not receiving any additional expected benefit by taking on market risk than you receive by paying off the credit card debt.I haven't mentioned taxes yet because I don't know your current and anticipated retirement tax rates. Assuming that the retirement marginal tax rate will be the same as your current marginal tax rate, and assuming you will have other income that will move your marginal tax rate up to your current marginal tax rate (e.g., a good pension or two), per dollar salary, you are looking at about the same dollar dollar salary having the same effect whether you pay taxes on it now and use it to retire the credit card debt, or invest it pre-tax, allow it to grow tax deferred, and pay your retirement income tax rates when you take the money out.A serious problem I see is where you said, "Since I purchased my home in ~'89, I have accumulated ~$50K of unsecured debt (@9.9% to 10-3/8%) & ~$20K against my home (9%)." If the debt was acquired during a period of unemployment and you are working it down, that is one thing. But if the debt has been climbing while you are employed and it is still growing, it suggests you are living about $5.8K/yr beyond your means and that will eventually spell big trouble.Unless you must shelter your assets (e.g., if you work in an occupation that tends to attract lawsuits), I would recommend getting a handle on spending (if that is the problem), then, only after spending is under control, reduce the retirement account contributions and use the money to pay off the credit card debts. (Judging from the numbers you posted, you are paying $5,000 on credit card interest alone, so getting those credit cards paid off would free up $5,000/yr for other purposes.) Then after the credit card debt is paid off, go back to full contribution to your retirement accounts.The 9% secured debts don't quite have the urgency if you are able to benefit from using them as a tax deduction. Even if you cannot benefit from using them as itemized deduction (e.g., if your itemized deductions don't exceed your standard deduction), the credit card debts are doing you more damange to your financial net worth than these 9% debts.Of course, since the only things we know about your financial situation is what you had posted, you will have to weigh any advice from anonymous glowing phosphors on your cathode ray tube against your actual financial situation and decide for yourself whether or not any of this makes sense for you. After all, you don't know what training is behind this advice (none).
Oh, for the want of a Flux Capacitor and 1.21GW of power! 8) LOL!!! Although I believe it was Jinka-Wats... (wouldn't that be JW's)? Oh well, got a good laugh out of me on that one!
Mark,I apologize for not following up on your excellent observations. I just found out how to "see replies"...and was a bit busy at times. Thank you for taking the time.~%50K left on the house. Market value of the house is ~$120K.Yes, the ~$20K is an equity loan on my home, so it, along with my mortgage interest, tithes, and charitable contributions, is deductible.The ~$250K is IRA and 403(b) (no ROTH, and ~95% is self-directed IRA). I am still contributing the full 20% possible in the 403(b), of which 6% is matched $ for $. This, I will continue to do. The 403(b) is split between two funds with T.Rowe Price. As aggressive as I have available, but, surprisingly, not hit as hard as some this year. To my knowledge, we pay no fees. Possibly absorbed by my employer?LOL....you echoed my thoughts about the cc companies. In fact, MBNA recently "inserted" a notice to increase my rate from 9.9% to 11.9%. I replied with a letter of declination, and, of course, cannot use this card, but, the interest rate remains the same. No biggie. I have it maxed to ~$24K anyway, representing ~half of my unsecured.I should not require a loan for a house or automobile, until this mortgage is paid off. I do not intend to move, and, I purchase my autos from my Dad (his old company cars).Excellent point about paying off the cc interest representing a guaranteed ROI vs. the market risk. I realize you did not have enough information about taxes. Of course, if I would cash out some of my IRA, I would incur the taxes, plus the 10% penalty, plus not having that money earning tax deferred.As long as I can keep my head above water, I'm hoping to wait and see if the market comes back, and, if I have a better than average ROI, then possibly withdrawing enough from my IRA to clean up the cc debt. But, I really hate taking the withdrawal hit.The debt has been directly related to about 2 years of unemployment since '94. I was employed by two excellent corporations, but both, in different industries, closed their doors locally. If it had not been for this time of unemployment, I doubt that I would have any non-secured debt. I am now in the networking field, which I enjoy, and in a position which appears to be very stable.....so, if I can just hang on until my mortgage is paid for.....My itemized deductions definitely exceed what my standard deduction would be.For having no training, your reply is excellent....I would never have known. Feel free to comment further. I very much appreciate the opportunity to bounce my situation off you.--Randy
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