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Author: cubfanjb Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75859  
Subject: investing question Date: 12/31/2007 12:03 PM
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I am thinking about taking a $100,000 retirement account and using it to pay down $71000 of unsecured debt. I am 57, so in addition to the 20% tax taken out, there is a 10% penalty, which will leave just about enough to take care of the debt. this will save me about $8900 a year just in interest and eliminate about $1600 a month in payments. Everything I read says using retirement money to pay down debt is a bad idea, but I am not sure. Any thoughts?
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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 60661 of 75859
Subject: Re: investing question Date: 12/31/2007 12:15 PM
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>> Everything I read says using retirement money to pay down debt is a bad idea, but I am not sure. Any thoughts? <<

Is the interest rate 12.5%? Is that correct? I base that on your statement that there is $8900 a year in interest payments on a $71,000 balance.

Are you still working? How long do you plan to continue working? How is your cash flow? How aggressively can you pay down this debt if you don't tap into your retirement account?

I doubt that I'd use the retirement account to pay this down; I pretty much always come on the side of NOT using 401Ks and IRAs to pay down debt unless it is the *absolute* final option standing between you and foreclosure or bankruptcy.

Most likely, you need to do everything you can to tighten the belt. Take another job if need be. Eat rice and beans. If you are contributing to a 401K plan at work, cut back so that you only contribute up to what your employer will match. If they don't match at all, suspend contributions and put it all into paying down this debt.

Do whatever you can to increase the cash flow that can be used to aggressively pay down this debt. Raiding your retirement is most likely NOT the way to go.

#29

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 60662 of 75859
Subject: Re: investing question Date: 12/31/2007 12:18 PM
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I am thinking about taking a $100,000 retirement account and using it to pay down $71000 of unsecured debt. I am 57, so in addition to the 20% tax taken out, there is a 10% penalty, which will leave just about enough to take care of the debt.

You need to rework your numbers. That 20% is the amount withheld for Federal income tax, not necessarily the amount of tax that you'll pay on the distribution. It could be higher, much higher if this also is taxed by your state. Figure out what you'll really have after taxes before proceeding.

this will save me about $8900 a year just in interest and eliminate about $1600 a month in payments.

This is pretty much meaningless without additional information about your plans (including those for the improved cashflow--see below), prospects and what retirement assets you'll be left with.

Not that you asked, but $71,000 in unsecured debt makes me think you could benefit from a little time with the folks on the budgeting board.

Phil

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Author: epc53 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 60669 of 75859
Subject: Re: investing question Date: 12/31/2007 1:50 PM
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I second all of ziggy and Phil's comments thus far. A distribution of that 100K adds it to your other income so it'll be taxed at 25 to 28% on most if not all of it, in addition to that 10% penalty.

Still not a happy thing to be doing, taking a loan from that 401K would avoid the penalty, pay lower interest and you would be paying the interest to yourself. If you leave that job the loan would become payable. If you couldn't pay it at that time the remaining loan rather than the original amount would be taxable income and the basis for the 10% penalty.

Some of the 401K loans take the payments directly from your check so its pretty painless. OTOH the loan amounts can be limited so you might have to tough out some of your debt (the lowest interest rate part since you'd pay off the highest interest loan with the 401K money).

I think this would be preferable to a distribution if you don't have another way out.

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Author: cliff666 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 60671 of 75859
Subject: Re: investing question Date: 12/31/2007 1:55 PM
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I am thinking about taking a $100,000 retirement account and using it to pay down $71000 of unsecured debt. I am 57, so in addition to the 20% tax taken out, there is a 10% penalty, which will leave just about enough to take care of the debt. this will save me about $8900 a year just in interest and eliminate about $1600 a month in payments. Everything I read says using retirement money to pay down debt is a bad idea, but I am not sure. Any thoughts?

There is another way to approach this. You can withdraw money with no penalty is you set up a Sustantially equal payment (SEP) withdrawal plan. You withdraw a fixed amount every year - ant you must do this until you're 59. I don't know how large the payments can be, but try it by taking big chunks and use it to pay down the debt quickly. You will still have to pay taxes on money withdrawn, btw - but no penalyt.

cliff

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 60673 of 75859
Subject: Re: investing question Date: 12/31/2007 2:05 PM
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>> There is another way to approach this. You can withdraw money with no penalty is you set up a Sustantially equal payment (SEP) withdrawal plan. You withdraw a fixed amount every year - ant you must do this until you're 59. <<

Actually in the case of a 57-year-old, it has to be done until age 62. When you use Rule 72(t), you have to take SEPPs until age 59 1/2 OR for at least five years, whichever is later. So if they took their first 72(t) distributions at age 57 this year, they'd have to take it for four more years and then after five years, at age 62, they could stop taking SEPP.

#29

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 60674 of 75859
Subject: Re: investing question Date: 12/31/2007 2:06 PM
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You can withdraw money with no penalty is you set up a Sustantially equal payment (SEP) withdrawal plan. You withdraw a fixed amount every year - ant you must do this until you're 59. I don't know how large the payments can be, but try it by taking big chunks and use it to pay down the debt quickly.

OP mentioned current age 57, so a SEPP would have to continue 5 years, not just until age 59 1/2. "Big chunks" doesn't correlate to a SEPP. The amount each year is fixed, no more, no less.

Phil

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 60677 of 75859
Subject: Re: investing question Date: 12/31/2007 2:26 PM
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.am thinking about taking a $100,000 retirement account and using it to pay down $71000 of unsecured debt....

What type of a retirement account?

If it is a Roth then you can probably take out the original contributions without paying a penalty or taxes. If it is a 401K you might be able to take a loan from it at a lower interest rate.

If the debt is for something like a medical bill, you might qualify for a hardship withdrawal and not have to pay the 10% penality

Theses also qualify as a "bad idea" but might be less bad then just withdrawing the money.

Greg

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Author: cliff666 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 60682 of 75859
Subject: Re: investing question Date: 12/31/2007 4:49 PM
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OP mentioned current age 57, so a SEPP would have to continue 5 years, not just until age 59 1/2. "Big chunks" doesn't correlate to a SEPP. The amount each year is fixed, no more, no less.

Phil

Correct me if I'm wrong, but can't you pick how much to withdraw when you start the SEPP? Can it not be enough to exhaust the fund in five years?

cliff

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 60684 of 75859
Subject: Re: investing question Date: 12/31/2007 4:53 PM
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Correct me if I'm wrong, but can't you pick how much to withdraw when you start the SEPP? Can it not be enough to exhaust the fund in five years?

Not unless you're so old that the whole issue of a SEPP is moot. There are several variables you can play with, but all SEPPs must be based on life expectancy, with the bottom line being that the funds are gone at the moment you head for your dirt nap.

Phil

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 60685 of 75859
Subject: Re: investing question Date: 12/31/2007 4:57 PM
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>> Correct me if I'm wrong, but can't you pick how much to withdraw when you start the SEPP? Can it not be enough to exhaust the fund in five years? <<

The "reasonable interest rate" used in calculating the annual distribution must be no more than 120% of the then-applicable Federal Mid-Term Rate when using the life expectancy option. This was a revenue ruling put in place in 2002.

Look under the calculator here for details:

http://www.bankrate.com/brm/calculators/retirement/72t_distribution_calculator.asp

#29

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Author: hockeypop Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 60686 of 75859
Subject: Re: investing question Date: 12/31/2007 6:15 PM
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I'd also make a visit and get a lesson in "tough love" at the "Credit Card and Consumer Debt" board. http://boards.fool.com/Messages.asp?mid=26236554&bid=100145

You need to change your lifestyle.

Hockeypop

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 60699 of 75859
Subject: Re: investing question Date: 1/1/2008 2:17 PM
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Everything I read says using retirement money to pay down debt is a bad idea, but I am not sure. Any thoughts?

If everything you've read says it's a bad idea, why are you "not sure"? Did you not understand the reasoning? Or do you just not like what you heard?

I'll go further---it's not just a bad idea---it's a stupid idea. Go back and re-read some of what you've read to see why I say it so strongly.

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 60707 of 75859
Subject: Re: investing question Date: 1/1/2008 5:25 PM
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I am thinking about taking a $100,000 retirement account and using it to pay down $71000 of unsecured debt. I am 57, so in addition to the 20% tax taken out, there is a 10% penalty, which will leave just about enough to take care of the debt. this will save me about $8900 a year just in interest and eliminate about $1600 a month in payments. Everything I read says using retirement money to pay down debt is a bad idea, but I am not sure. Any thoughts?

As many have mentioned, raiding your retirement funds to pay off unsecured debt is a really bad idea. And even without considering any state taxes, your '$100k' would probably end up closer to being $62k - $65k due to 25% - 28% taxes plus the 10% penalty.

However, if you are committed to the idea of withdrawing your 401(k) money, since you are older than 55, you could avoid the 10% penalty by quitting your job. 401(k) withdrawals are not subject to a 10% penalty if you leave the service of the company that operates the 401(k) plan during or after the year you turn 55. That way you would at least end up with $72k - $75k (considering federal taxes only) from your 401(k).

Obviously, you would want to find another job that paid as much or more, before you quit your current job. With $71k in debt that you can't seem to pay off, and only $100k in a 401(k), you seem to be living above your means, and at age 57, you don't have a lot more time to build up money to make your retirement a comfortable one. And if you are living above your means on your current salary, Social Security and pensions alone won't provide enough money for you to continue your current lifestyle.

AJ

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Author: cubfanjb Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 60724 of 75859
Subject: Re: investing question Date: 1/2/2008 9:48 AM
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Thanks for your thoughts. I retired from my previous job last May and am collecting a $17,000 a year pension. Since then, I have found another job (making more money). The account I refer to is not a 401k. It is an annuity savings account funded by the state teacher's association. I have an additional $58,000 in several other acoounts (401a's, 403b's, mutual funds, etc.) and $54000 in a health savings account. The greatest part of my debt is college-related expenses for my two sons. My concern is, of course, becoming as debt free as possible as soon as possible. The replies I have received have confirmed my thought that it is better to leave the tax-deferred funds alone, allowing them to compound, and work on elminating the debt. This does not really pose a great problem, but I wonder about three to four years of those interest payments as opposed to three to four years of investing that monthly payment money. Again, thanks for your thoughts.

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Author: clifp Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 60944 of 75859
Subject: Re: investing question Date: 1/11/2008 4:27 AM
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it is an annuity savings account funded by the state teacher's association.

Sadly these type of annuity account more often than not such have such horrendous fees and very low returns that it possible you may actually be better off taking money out of it. Unfortunately, without knowing the particulars of the account it hard to give actionable advice.

A few other questions, what is the interest rates of the loans? Are any of them deductable? Do you own house with any equity. Is possible to take loans from any other account?

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