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Subject:  Re: Newbie IRA question Date:  12/31/2004  4:01 PM
Author:  ziggy29 Number:  43804 of 90137

>> I have a very little IRA I started a year or two ago that has $302. I also have in the neighborhood of $20,000 of debt (credit cards and car loan). I'm wondering if I should withdraw the money and take the penalty to start my mini e-fund and snowball payments.

I am contributing 6% to my 401k, taking full advantage of the employer matching (50% up to 6)... my 401k has a few thousand dollars in in already and I'm just coming up on a year with my employer. I am surprised how fast it has grown, and the $300 IRA now seems very small.

First of all, don't touch the IRA. $302 (probably less than $200 after taxes and penalties) won't make a significant dent in the debt. Find another way to pay it down.

As for the other questions about the debt and your 401(k) plan, the best course of action likely depends on how well you are able to reduce the debt *and* the interest rates on the loans (and the amount owed at each interest rate).

Contributing to a 401k to the full extent of the employer match is generally always a very good thing, and I'd not consider reducing that contribution below the full match unless (a) it will otherwise take a very long time to eliminate the debt and (b) the interest rates are pretty punitive (probably true with the credit card, at least).

If you're making steady progress toward paying down the debt and you're not reaching for the plastic to make it worse, I'd not stop contributing the full matching amount to your 401k. If you are making little progress on paying down the credit card -- and it's a significant amount that costs you a lot of interest any month -- and you've really, *really* tried to cut back on other things to find the cash flow to pay it down and failed...then and only then would I consider reducing my 401k contribution below the full employer match. Only then. And even then I'd be at least somewhat reluctant.

More than likely, the credit card has a double-digit rate and the car loan a mid-to-high single digit rate. I don't think I'd forego the company match to pay down a debt with single-digit interest rate. Plus a car loan is structured for paydown in 3-5 years (usually) whereas credit cards can eat you alive ad infinitum if you pay near the minimum each month.

Perhaps you can break down the loans by interest rate and amount owed at each rate? (And the remaining duration of the car loan). I think you can get more tailored (and better) advice that way.


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