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Author: aka87fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308349  
Subject: Retirement & Paying off debt Date: 6/11/2001 8:19 PM
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I am leaving a government job where we had no 401(K) one year before I vest in my retirement plan. My new job will pay $20,000+ yearly. I have a shameful $9,000 in debt excluding my student loans. I should have $25,000 in my retirement plan. I estimate that I will receive some $3,400 from my deferred comp & reimbursement from paid vacation and sick leave time. I was planning to rollover my retirement into an IRA. My plan is to take the $3,400 and pay down my $9,000 because I want to keep my retirement money. Is this the smartest option? Despite the tax penalties should I pay off the whole amount with my retirement? My new job has no retirement plan....I've already been looking into a new retirement plan with a brokerage. What do you think?
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Author: warrl 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: 75712 of 308349
Subject: Re: Retirement & Paying off debt Date: 6/11/2001 9:37 PM
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IDEALLY...

only the portion of the $3,400 that is NOT from your deferred comp would be used to pay down debt. After all, the point of the "deferred" is that you haven't paid income taxes on it yet - it's in a tax sheltered retirement account, so you would roll it over into a conventional IRA.

The $25K you can also roll over into a conventional IRA. With that amount, I would most likely choose to roll over even if I would be permitted to leave it in the pension fund. (I just recently made a much different choice, but I'm in a much different situation.)

BUT...

Are you saying that your new job is going to pay you about twenty grand a year? I'm wondering about your cash flow to cover your living expenses on that income. I'm also wondering how you built up so much in the retirement system.

If you have cash flow problems, it may be wise to withdraw the money from your retirement account (after you roll it over) to simply pay of the $9000. That is HORRIBLE advice... but being delinquent on your loans, or not eating on days that end in "Y", is even worse.


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Author: eslovick Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75737 of 308349
Subject: Re: Retirement & Paying off debt Date: 6/12/2001 12:18 AM
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aka87fool,

I think you have things well in hand, and have a great plan. If I were you, I would put the 401k into the IRA, and pay down the $9,000 with the $3,400, just like you are planning.
You have a good head on your shoulders.

Beth

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Author: eslovick Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75739 of 308349
Subject: Re: Retirement & Paying off debt Date: 6/12/2001 12:35 AM
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aka87fool,

Oops. I didn't read that part about the deferred compensation quick enough. If it is any pensiony kinda thing, I would leave it alone.

Beth

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Author: aja91 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75754 of 308349
Subject: Re: Retirement & Paying off debt Date: 6/12/2001 8:15 AM
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I am leaving a government job where we had no 401(K) one year before I vest in my retirement plan. My new job will pay $20,000+ yearly. I have a shameful $9,000 in debt excluding my student loans. I should have $25,000 in my retirement plan. I estimate that I will receive some $3,400 from my deferred comp & reimbursement from paid vacation and sick leave time. I was planning to rollover my retirement into an IRA. My plan is to take the $3,400 and pay down my $9,000 because I want to keep my retirement money. Is this the smartest option? Despite the tax penalties should I pay off the whole amount with my retirement? My new job has no retirement plan....I've already been looking into a new retirement plan with a brokerage. What do you think?

I guess I'm a bit confused on what the first few sentences mean. You say your current job had no 401(k) plan. You are leaving one year before you vest in your retirement plan. Then you say you have $25,000 in your retirement plan. I'm going to assume that this means you just missed out on a pension, and that there's some type of you-can't-contribute-to-it-but-employer-does retirement fund that you can roll into an IRA.

On that part of the plan, I'd agree with you. Make certain you understand the implications of this from all angles. What tax hit will you take? Is there some amount of this plan that you lose due to not being vested? Or is this taken into account in the $25,000 figure?

One question: are you certain rolling this money into an IRA is the best choice? Check with the administrator of the retirement plan from which you'll receive the $25,000. Will they continue contributions for you? How does it obtain its growth? It's possible (though I doubt it) that you could be better off leaving the money alone. I'm simply recommending that you understand what you might be giving up by removing the money.

All that aside, please don't tap these funds to pay off the $9,000 in debt that you have! You want to keep that nest egg intact and growing. You'll get all of the debt paid off even without doing so.

Now, on to the $3,400 you expect to receive. First, I'd keep a portion of this in a savings or money market account for emergencies only -- let's say $1,000. For the remainder, try to allocate the money to pay off in full as many debts as you can. (You didn't mention if the $9,000 is all one debt or many smaller -- this assumes the latter, obviously). My thinking is that by paying off as many smaller debts as possible, you are freeing up the money that used to go to minimum payments on those for attacking the remaining debts. Of those not paid in full with this lump sum, focus those extra dollars towards the highest interest rate debt remaining. Keep rolling those dollars and paid-off-former-minimums rolling into the next debt. Before you know it, all of them will be gone.

Finally, since your new employer doesn't have a retirement plan, consider opening a Roth IRA at a brokerage house as you mentioned. Personally, I'd recommend getting the $9,000 paid off first and then going for the Roth.

Hope this helps.

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