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My husband and I are feeling very trapped by our credit card and student loan debt. We pay back more than the minimum each month but we still figure it will take at least four years to get it all paid off.

In a few weeks, I will be leaving my job to pursue a Master's degree. We can live on my husband's income and still pay what we are paying toward the debt, and I plan on picking up part time work. However, when I leave the company, I will have to roll my 401K over into an IRA. My question is: If I set aside the penalty and tax amount, would it be better to take a chunk of that money and pay off the credit cards? I know its a huge hit to take on the taxes, and that it would leave my retirement fund a little thin, but I am tired of being enslaved to debt. My husband can't pursue his dream career because we need the sizeable income he makes as a software engineer. And I feel like a heel for going after my dream when we have the debt hanging over our heads.

What do you think? Any advice will be greatly appreciated!
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If you can live on dh income, why isn't your entire income going to cc debt? Why not wait until winter quarter or next year and plow all your income towards debt? Sometimes a dream needs to wait until it is more realistic.

L
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I will have to roll my 401K over into an IRA. My question is: If I set aside the penalty and tax amount, would it be better to take a chunk of that money and pay off the credit cards?

Well, since you asked for opinions --- NO! NO! NO! NO!!!!!!!!!!!!!!!!

You may be feeling quite burdened by credit card debt, but keep looking at the long term picture. Not only would you be paying penalty and tax on that retirement money, you would also be sacrificing the compounding of that money. You would be using present dollars and future dollars. Don't let a short term problem cause you a larger long term problem.

Carillon
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I agree with Carillon ... please, do NOT use any part of that 401(k) for debt retirement. You'll take up to a 40% hit on the money withdrawn (penalty and taxes), but the real loss comes in missed growth. TIME is the biggest friend anyone has in investing. Leave the 401(k) alone.

It would be better to put off the Masters and plow your income into the debts. The program will still be there. Or, just keep to your payment schedule, since it is working.

Personally, I would leave the 401K alone, put off school for a year, and use my income to pay off the debt (living off of hubby's income) ... as another poster had indicated.

I speak from experience. About 12 years ago, I used a tiny little fraction of my 401K, emphasis on tiny, to pay off a credit card debt I was just "tired" of dealing with. It was the single biggest mistake I have ever made. That little amount would have given me, if left alone, a 401K balance of over $30,000 more (yes, thirty THOUSAND dollars MORE) than I currently have (and compounding all the time). OUCH !!! Do you realize what that bad decision will cost me by the time I retire? I don't even want to look at the number. And that doesn't even take into consideration the money I donated back to the government unnecessarily, in the form of a penalty and taxes. I never again ran up a charge that I couldn't pay off the very next month, but it was an extremely expensive lesson. Please learn from my own mistake. This goes for everyone reading this post ... please, do NOT hit the 401k (or IRAs) if you can possibly help it. You will thank me 10, 20, 30 or 40 years down the road. It is painful to admit, but almost worth it if it prevents others from duplicating my mistake. For the record, I learned my lesson, but I will never be able to make up for the lost years. Perhaps you will be spared the 20/20 hindsight and will be able to look ahead instead. Good luck!
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Thank you all for your posts! I think that upon consideration of this information, I will reconsider the use of my 401K to retire debt. So now my next question is: What type of account do I roll my 401K into? Regardless of whether I go to school or not, I will be leaving my company mid-July so it has to go somewhere. Thanks again!
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"What type of account do I roll my 401K into?"

Assuming you meet the income requirements, your best bet is probably a traditional rollover IRA. You can structure an IRA however you like, using mutual funds, bonds, money market funds, common stocks, or even in some cases real estate and commodity investments. Just make sure you handle your paperwork right so you don't get socked with taxes and fees. What kind of investments to use depends on your time horizon, risk tolerance, and investment acumen.

Personally, I like picking stocks and have a long time horizon, so I invest in 100% stocks, but that's just me. My advice to you is not to take direct investment advice from anyone on this board (me included), because they don't know your financial situation. But I would suggest that regardless of how you feel comfortable investing your money, you set up an IRA that allows many different kinds of investments. That way, you don't have to deal with a lot of paperwork and extra charges if your investment needs and interests change.

If you have some spare cash and a long time horizon, you might want to convert your new IRA into a Roth IRA to reap greater long-term tax benefits. That usually makes sense if you can pay the taxes with your own after-tax dollars, though if you're young enough and plan to leave the money in for a long time, you might consider a conversion even if you have to pull the cash out of the IRA and pay a fee. There are risks involved with that, so crunch your numbers first. It depends entirely on your individual situation.


Benevolent
Avoiding taxes legally since 1902
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your best bet is probably a traditional rollover IRA.

A 'rollover' IRA is a special designation that financial companies often put on accounts that have come from 401(k)/403(b) accounts. If you keep this money separate and later go to a company that has an amazing 401(k), you will be able to move your rollover money to your new 401(k) account.

If you combine the money from your 401(k) with IRA contributions, you will not be able to move this commingled money to a new 401(k)... which may not be a big deal if you're happy with your stock picking.

A traditional IRA is in contrast to a Roth IRA. With a Roth, you pay the income tax on your contributions up front, and with a traditional you pay them when you take the money out at retirement.

To move a 401(K) to a Roth, you will need to go first to a traditional IRA, then convert some or all of the account and pay the taxes due.

As Benevolent mentioned, you can build an IRA out of any financial instrument... IRAs are not just the interest paying accounts offered by your bank.

- KK
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Assuming you meet the income requirements, your best bet is probably a traditional rollover IRA.

I am unaware of any income requirement for traditional rollover IRAs. What are they?

IF
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"A 'rollover' IRA is a special designation that financial companies often put on accounts that have come from 401(k)/403(b) accounts. If you keep this money separate and later go to a company that has an amazing 401(k), you will be able to move your rollover money to your new 401(k) account.

If you combine the money from your 401(k) with IRA contributions, you will not be able to move this commingled money to a new 401(k)... which may not be a big deal if you're happy with your stock picking. "

Thanks for the clarification, Kate. I was trying to be concise, but sometimes brevity sacrifices clarity. In this case, I should have erred on the side of clarity.

Benevolent
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Since you asked...NO! Don't touch the 401K!

Let me offer another opinion on School. If you and DH plan to have kids, go to grad school now. It is really hard to do grad school when you have young children.

One issue I've never seen discussed on this BB is the cost of infertility. If you want to have kids, consider getting your degree quickly and then starting your family.

Waiting until your mid-30s dramatically increases the chances you won't be able to have kids when you want to. And then you either pay thousands of dollars for medical care, or you pay thousands for adoption costs.

Also, can you think creatively about grad school...is there a job you can take that would pay for your classes? Some corporations have educational assistance programs. Some universities offer reduced or zero tuition for employees and their immediate families.

Finally, why are you wanting graduate school? What do you plan to study? Think about whether the degree you seek will actually have economic value. It doesn't make sense to spend $25K on a degree that will qualify you for a $35K per year job. If you want the degree for enjoyment or general knowledge, that's fine. But most of us can't afford that kind of luxury.

Best wishes with your continued debt reduction!

++thinx
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I don't know of income requirements for a regular IRA rollover, either.
But there are some if you decide to go for a Roth IRA. First of all,
as mentioned before, you have to roll from the 401K to a regular IRA.
Then you can roll from a regular IRA to a Roth.

But you can only do this if your combined income is less than $100K in the
year that you make the rollover. And, of course, you have to pay income
tax on the amount that you roll over.


If your income is over the limit this year, though, maybe it won't be next
year since you'll only be working part time. Also, a lot of 401K plans
don't require you to close the account when you leave the company if you
have over a certain amount (usually $10k). So if you're happy with your
current investments, you could choose just to leave it alone.
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Dear thinx2mch,
Thank you very much for your reply! To answer your question about grad school -- its a career change for me. I will be pursuing an MA in English with a TESL (Teaching English as a Second Language) emphasis. I currently work for a telecommunications company as an IT Analyst. When I finished my undergrad in History, I took a summer job here to make some money before heading off to grad school. Well, six years later, I am still here. For as long as I can remember, I have wanted to teach, but I have wanted to teach adults. I have also wanted to do something that would make a difference in this world. Right now all I am doing is making a select few very rich. It will be a drastic cut in potential pay. But the money is not my overriding motivation. It hasn't really made me happy even though I make as much money now as my father, and he's been working for 30+ years.

As for a job while in school, I am working on doing some consulting work that would allow me to make some decent money but give me the flexibility for classes. So I'm not going to rob my 401K afterall.

I appreciate your thoughts!

irishprincess
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IF, I don't believe there are any income requirements for rollling over a 401k. I misspoke myself. I should have differentiated between a rollover and traditional IRA right from the start.

Benevolent
Shutting up now
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