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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75540  
Subject: Re: Early Withdrawal or Loan? Date: 6/16/1998 7:29 PM
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Greetings, Sparkler, and welcome.

<< I have such heavy CC debt that I must pay it off. I've done everything to move all of the balances to low rates, but still am having trouble seeing my way clear. I owe $25k.

My 401(k) situation is this: I have $24k in my old employer's plan, invested 100% in Fidelity Spartan US Equity Index Fund (S&P Index). At my new job, I am now (after three months of employment) eligible to join the new 401(k) plan. I am 28 years old. I do not know how long I will be at this job, but would like to stay at least 3 years. I don't own a house, and have no wealthy (or generous) relatives.

So, to pay of this debt, should I
a.) Take a withdrawal of the full amount, pay the taxes (which, if I am correct, will be 28% - my bracket - plus 10% penalty for early w/d), pay off the CCs and start fresh in retirement savings, or
b.) Roll-over the old into the new 401(k), take a loan for $12,000 (max allowed at new company), pay off what I can, in the hopes that I will stay at my new job for the length of the loan.
I guess I'm asking, if I leave my new job with an outstanding loan, will the tax implications be worse than if I took the whole amount ($24k)? I hope these questions makes sense. My debt makes me CRAZY ;-) >>

We can't tell you what to do, but we can show you the consequences. If you cash in the 401k, after minimum federal taxes (what about state?) and penalty you will net $14,880, still leaving you with $11K+ of debt. If you take the loan, you'll be able to pay down the cards to $13K+, but will have to begin repaying the loan to yourself over at least five years. Can you afford to do so? And if you leave before it's repaid, you must come up with the outstanding balance. If you can't, it will be taxed and assessed the 10% penalty at that time. The hit, though, will be far less than if you took it all now.

All things considered, IMHO if you can swing the added repayment to your current payments, I would vote for the loan. That way you can keep far more of what you've worked for, and still cut the existing card debt nearly in half.

Regards…..Pixy





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