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Should a person borrow money on a credit card to invest in stock mutual funds?

If not, I have a question about which of my retirement funds I should withdraw money from.

My CC pay down continues. Overall balance is down almost $10k from twelve months ago, but yes--"raiding the retirement account" is on the table! What I did with my money in the past is about to get a do-over.
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My personal view is that no, you should not go into debt to invest in stocks. It seems to me that you would be borrowing at something like 15% to get a reasonable return of perhaps 8% if you are really good at investing. That is a losing bargain every day of the year. (Think you can do better? Maybe you can. But I suggest you prove it with some genuinely available cash before taking other risks.)

I'm not sure I understand what your goal is in raiding the retirement account. Would that be to go the other direction and pay off debt that's at something like 15% with money that is only earning 8%? That may be reasonable, but you will need to think through the tax and other implications. AJ and others who are financially incredibly savvy can give you better advice than I can on that part.

What I will say is this. You've reduced your debt by $10k. That's about the same as losing 50 pounds. It's brutally hard. Even harder is continuing to build the habits and practices that make this way of doing things absolutely standard and automatic. Though the remaining debt may be weighing on you, it is also forcing you to learn to think, act, and live differently than you did before. It may actually not pay off in the very long run to short-circuit that learning process.

ThyPeace, this kind of discomfort is the feeling of growth. Feels yucky, I know.
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Welcome back!

Should a person borrow money on a credit card to invest in stock mutual funds?

No.

If not, I have a question about which of my retirement funds I should withdraw money from.

How does not borrowing on credit cards lead to being okay with withdrawing from retirement accounts to pay off debt? Did you borrow on your credit cards to make the retirement account contributions? I highly doubt that you did. Instead, you decided to finance a lifestyle that was above your means by using credit cards. Even if you did use credit card advances to make retirement account contributions, two wrongs don't make a right. You already made a mistake by running up the debt - don't compound it by taking money out of your retirement accounts to pay it off.

My CC pay down continues. Overall balance is down almost $10k from twelve months ago

Good job! Although, I must say, that if the balance is around the $42,315 that you posted in this post https://boards.fool.com/4231530-34347316.aspx 2 months ago, that balance was already up $10k from this thread https://boards.fool.com/coming-to-terms-31121415.aspx?sort=w... from almost 6 years ago. So it seems like things got worse before you really started on your pay down journey.

but yes--"raiding the retirement account" is on the table!

BAD idea!!!!

If you are under 59 1/2, and the account is a Traditional account, you will owe taxes at your marginal rate (probably at least 22% - but it could be higher) plus a 10% penalty. That means that in order to net $42,315 to pay off the credit cards after taxes and penalties, you will have to withdraw at least $62,227 from your retirement account - more if you are in a higher income bracket. And if your state has an income tax, the amount would be higher still.

In just 10 years, at a 6% CAGR, you would instead $111,439 in your retirement account.

What I did with my money in the past is about to get a do-over.

Without getting any more details than what you've already provided, I would say that raiding the retirement account would actually be continuing the past irresponsible behavior. You would be attempting to take the easy way out, and wouldn't actually solve anything. As I suggested in your original thread:

If you can't resolve the problem of putting money away to pay for items that you know you will have to pay in the future, you are likely to be forever stuck in debt.

Here it is, 6 years later, and you have more debt than you had then.

To fix this problem, you need to do several things:

- Stop putting any/all new charges on credit cards - you can't fill the hole in until you stop digging
- Start writing down every single penny that you (and your family) spend
- Examine that spending for leaks that can be stopped, so that you can devote that money to the debt
- Find additional income from side jobs or selling things on Craigslist or FB and put that money toward debt
- Put every extra dollar (tax refunds, bonuses, gifts, etc.) toward debt
- Consider reducing retirement account contributions down to just enough to get any employer match

You can find a lot of support, ideas and different ways of looking at things on this board, if you're willing to share.

AJ
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The reason for the first question is because that is essentially what I am doing. I have credit card debt at 16.75% (borrowing) and also have a retirement account (investing). Therefore I am borrowing from a credit card to invest in stock funds. I think you are right. It doesn't make sense to hope for investment returns consistently better than the 16.75% I am paying.

The $10,000 pay down was partly facilitated by decreasing my contributions to the retirement account. More money towards zero-the-cards. I want to take that a step further and retroactively invest less, pulling those past funds and sending them to the zero-the-cards mission. Instead of hoping for a good year in the retirement account, those dollars will earn closer to 16.75% this year (less fees/taxes/penalties).

I am looking at taking money from one or both of these:

1. Roth IRAs. In total balance sits at only $10,634. It is probably a no brainer (even with 10% penalty and taxes on earnings) to cash out of these and "do over" with that money. CC rate of 16.49% is in my sights.

2. 457 plan thru work. Balance $138,246 after a gain of 29.06% during 2019. That gain is very much atypical. In fact, I somewhat expect to lose much/all of that gain over the next 12 months, and would like to use some of the money before it vanishes with the 2020 election process. This money would be a loan against the balance at 4.5% with a $24 per year service fee. 4.5% vs 16.75%.

I am pressing forward, busting arse full steam with all of the other efforts that worked in 2019. I don't intend to pay one penny of credit card interest in 2021. All options are on the table.
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AJ, can we talk about this one:

2. 457 plan thru work. Balance $138,246 after a gain of 29.06% during 2019. That gain is very much atypical. In fact, I somewhat expect to lose much/all of that gain over the next 12 months, and would like to use some of the money before it vanishes with the 2020 election process. This money would be a loan against the balance at 4.5% with a $24 per year service fee. 4.5% vs 16.75%.

This one would be a loan. Essentially a balance transfer from 16.75% to 4.5% with a fixed payment, payroll deducted, for between 1-5 years. The money will be trickling back into the 457 until it is all right back in. Any interest or loss that those dollars would have incurred sitting in the stock funds is what I'd be giving up. Do you think the funds would beat 12.25% (16.75-4.5%) during the payback period?

I really REALLY think the fund will lose money over the next 16 months. If I have less invested during that time then there will be less loss. Of course, some of this is indeed speculation, but some is concrete.
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I am pressing forward, busting arse full steam with all of the other efforts that worked in 2019. I don't intend to pay one penny of credit card interest in 2021. All options are on the table.

Sorry, I'm afraid that nothing I can say will convince you that you are on the wrong path. But since your debt pay down was facilitated by cutting your retirement plan contributions, rather than by actually examining your spending, finding what you were overspending on, and cutting back on that spending, it is very unlikely that you will improve your financial position by taking the path you are planning.

Instead, you are very likely to end up in worse financial shape because you haven't learned to live within your means, and once the credit cards are paid off, your spending will increase, and you will end up in debt again. Only this time, you won't have nearly as much in your retirement plans to pull from.

If you are convinced that the path you have chosen is the right one, all I can do is wish you luck.

AJ
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For the love of God...CREDIT CARD INTEREST is what I am overspending on, and what I am over spending on. Never mind.
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2. 457 plan thru work. Balance $138,246 after a gain of 29.06% during 2019. That gain is very much atypical. In fact, I somewhat expect to lose much/all of that gain over the next 12 months, and would like to use some of the money before it vanishes with the 2020 election process. This money would be a loan against the balance at 4.5% with a $24 per year service fee. 4.5% vs 16.75%.

The question is - if you leave your job, voluntarily or involuntarily, during the loan payoff period, will you have the money pay the loan back? Since you are borrowing to pay back your current credit card debt, I highly doubt it. If you can't pay the loan back, the remaining balance will become an early distribution, and you will owe taxes at your marginal rate, plus a 10% penalty (if you are under 59 1/2), just for Federal income taxes. If your state has an income tax, you will owe more.

This one would be a loan. Essentially a balance transfer from 16.75% to 4.5% with a fixed payment, payroll deducted, for between 1-5 years. The money will be trickling back into the 457 until it is all right back in. Any interest or loss that those dollars would have incurred sitting in the stock funds is what I'd be giving up. Do you think the funds would beat 12.25% (16.75-4.5%) during the payback period?

Yeah, I know it would be a loan, and you would be "paying yourself back". You're not looking at the real risk of taking out a retirement plan loan - being unable to pay the loan back if your leave your job, either voluntarily or involuntarily. The risk of that is a 32%+ tax and penalty bill on the remaining balance, in addition to not actually getting the money back into your retirement plan.

You said you cut your retirement plan contributions. What other techniques have you tried in your debt pay down? Have you looked for balance transfers? Have you stuck to a budget? Have you cut your spending? Have you tried selling things? Have you tried getting side gigs?

Again, you seem to be wanting to take the easy way out, rather than actually fixing the problem. If you don't actually fix the root problem of living above your means, this raid on your retirement plan is unlikely to be your last one, and you will end up in worse financial shape than you currently are. Paying off credit cards without fixing a problem of living above your means just gives you more credit to live above your means with.

I really REALLY think the fund will lose money over the next 16 months. If I have less invested during that time then there will be less loss. Of course, some of this is indeed speculation, but some is concrete.

Then change the investment now - before it loses money. As long as you don't sell your investments after they've dropped, you don't actually lose any money. A drop in your account value isn't a loss until you actually realize the loss by selling the investment when it's down.

But if things are really going to get that bad in the next 16 months, how likely is it that you will lose your job, and end up paying 32%+ in taxes and penalties? On a $40k balance, that's an extra $12.8k that you will need to come up with to pay the IRS. How would you come up with that? Take cash advances from the credit cards?

AJ
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For the love of God...CREDIT CARD INTEREST is what I am overspending on, and what I am over spending on. Never mind.

You just confirmed that nothing I can say will convince you that you are on the wrong path. You came looking for confirmation that your idea is the right thing to do, rather than looking for ideas on how to actually fix the problem. Sorry, I can't give that confirmation to you.

The credit card interest is a symptom of the problem. Even at 16.75%, the $7k that you are spending on interest annually is not what caused the $42k in debt in the first place. Treating the symptoms without fixing the root cause is going to keep you on the debt treadmill.

Good luck.

AJ
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<<Should a person borrow money on a credit card to invest in stock mutual funds?>>



I would not.



Seattle Pioneer
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<< More money towards zero-the-cards. I want to take that a step further and retroactively invest less, pulling those past funds and sending them to the zero-the-cards mission. Instead of hoping for a good year in the retirement account, those dollars will earn closer to 16.75% this year (less fees/taxes/penalties).>>



Personally, my attitude towards retirement accounts has been like membership in the Irish Republican Army:

Once in, never out.



Seattle OPioneer
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For the love of God...CREDIT CARD INTEREST is what I am overspending on, and what I am over spending on. Never mind.


Yeah. You're paying, what, $500 a month or something in interest alone?

But there seems to be something you aren't getting. That's a consequence of overspending before, not the reason you're overspending. I mean, sure, it contributes additional overspending. But you were obviously overspending or you wouldn't owe that interest in the first place. Get it?

Either we're missing some bit of data about you having changed your self-destructive habits already, or you're a stubborn moron. And to be honest, the fact that you are considering pulling retirement assets to help the situation in the short term is a clue that you haven't changed your self-destructive habits. Maybe that's an incorrect assessment on our part, but you haven't given us any information to the contrary.

AJ's position is spot on (assuming we've made a correct assessment), and the fact that you have this attitude towards her position is, frankly, ANOTHER clue that you haven't changed your habits. Maybe I'm wrong and you absolutely have changed them, but you haven't said as much, and the clues hint otherwise.

Either way, buckle down even harder to pay down that debt now, without making decisions that will jeopardize your comfort later in your life.

xtn
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Should a person borrow money on a credit card to invest in stock mutual funds?
No

If not, I have a question about which of my retirement funds I should withdraw money from.

None. Didn't know about the Irish Army but I used the Hotel California for mine.


I am sure someone else went over it but there are an amazing number of unintended consequences when trying to fix overspending by borrowing - usually they involve the IRS. Go for the root cause.

If you continue on this path and the market drops by 20%, then what ? Have you looked at 1987 or 2008 ?
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Manybills,

You wrote, For the love of God...CREDIT CARD INTEREST is what I am overspending on, and what I am over spending on. Never mind.

Perhaps your time would be better spent on trying to negotiate a lower interest rate? ... If that's really the problem.

What you're failing to look at is the expense you are blindly willing to incur (or at least risk) if you borrow against retirement funds. You do understand that if it gets treated as a forced early withdrawal the penalties are quite punitive?

I think this may be symptomatic of a bigger problem - one where you fail to do enough forward planning. Where you are looking at the short-term consequences without examining the risks and potential long-term consequences. It's pretty common with people that are hooked on instant gratification.

I recently renewed an old friendship and unfortunately realized he has a case of this worse than anyone ever seen. It explains a lot of the issues he's been dealing with. Unfortunately I don't think there's anything I can do to help him fix it - he has to want to address his problems on his own or nothing I say is really going to help.

- Joel
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I recently renewed an old friendship and unfortunately realized he has a case of this worse than anyone ever seen.

I am currently reading/listening to _Principles_ by Ray Dalio. One thing that he emphasizes is the importance of figuring out where you do not have the expertise to make a good decision, and then deferring to others who are more believable than you are based on their proven track record of doing whatever needs to be done.

We all do that to some extent, but he formalizes the process. Interesting to think about the process of making decisions in that much detail.

ThyPeace, the entire book is like that -- obvious sounding at first, but then you see how he has developed something and all of a sudden it's brilliant. Management principles, oy. I would have to re-learn everything I know about working in an organization to be able to work at his firm.
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Hindsight.
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Hindsight.

Yes, taking out a 457 loan in January would have helped you 'lock in' part of your gains by selling investments to fund the loan at/near the top. (Any funds remaining invested would have still had losses.) However, as previously suggested, you could have locked in all of your gains by selling all of the investments and putting the funds into your plan's version of a money market account - often called a 'GIC' or 'Stable Value' fund. That would have been engaging in market timing. Hindsight is very perceptive in determining when to do market timing. Foresight, often not so perceptive.

That said, taking out a 457 loan in January and using it to pay your credit cards would have also exposed you to a significant risk if you were laid off. I know you say your primary employment is 'stable' - but if things go really bad, you may find that your employment is not as stable as you think it is. With the relief bill that was just passed, you may be able to avoid penalties. But you would still owe taxes on a loan ends up being a distribution. If you had borrowed $42k and lost your job, and were unable to pay, say, $40k back, at a 22% marginal rate, that would have resulted in an additional $8800 in taxes, even without penalties.

With the 0% BT that you were able to snag, you've effectively cut the current interest you're paying about in half. If you manage to pay down the card that's paying you interest in 8 months, you'll pay $670 more in interest on that, plus the $350 or so you've paid since January. And then, if it takes you another 6 months after the BT expires to pay down $10k at 17%, that will cost you another $450 in interest. That's a total interest of $1,470 - as compared to $8,800 in taxes that could potentially owe.

Actually resolving the issues that caused your overspending and sticking to a budget, as you are doing now, will serve you better in the long run. And it is likely that your 457 will recover, as long as you haven't panicked and sold everything.

AJ
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