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Having been at my current job for one year, I am now eligible to participate in the 401(k) program starting in January. Since I have the option to defer enrollment to either April or August, I want to hold off enrollment to use the extra income (from a salary increase) towards my credit card debt. Is this a good idea? Also, I have over $2,700 in a retirement account from my previous employer. Should I close the account, take the tax penalty and use what's left over for debt? I'm 25 years old and figure that I have some time to rebuild my retirement savings. I'm also investing $50 a month in a no-load mutual fund.

My opinion:

First off, you didn't mention the specifics of your plan, particularly if your employer matches your contribution at all. I'll assume that they do, in the humble amount of 25%. If this is not the case, please take that into account when reading the following:

First, don't even think about cashing out that 3k. You would only get about half of that. In 40 years (when you might retire), that 3k will be worth about $145,000, assuming a growth rate of 10% (lower than long-term market aveage). Compare that to the $1,500 you would get cashing out the account. What do ya' think?

Second, start your contributions NOW. I disagree with Tony (sorry), and think it would behoove you to start contributing now. My explanatinon (refer again to the assumption):

Your employer is contributing 25% to your contributions. This is FREE money. Let's assume you make $30,000, and contribute 6% to your 401k (the most your employer will match). So, you contribute $150 a month, plus your employer's match of $37.50, for a total of $187.50. Your after tax cost is only $100, as all contributions are made pre-tax. So, assuming that you hang around with your employer long enough to vest, you've made an instant return of 87.5%, plus you'll have that extra cash working for you for 40 years. Remember my ealier example?

Even if your employer doesn't match, you'll still be contributing $150 for a cost of $100 (cuz you're still saving taxes). Sure, it'll be taxed in the end. But by that point, Uncle Sam's money has worked for you for 40 years.

So, I'd only delay your contributin if one of the following:
1. Your credit card interest exceeds 87.5%.
2. You simply don't make enough money to live, and the $100 (or whatever) is the only thing keeping food on the table every month.

Finally, although you're investing in a no-load mutual fund, I'd still investigate an index fund.

My two cents....

-Dave Ortman
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