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Ask Susan Responses
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Taxes: Retirement Funds |
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More Ask Susan |
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I am changing jobs for health reasons and going to a lower stress (and pay) job. My new job will not have a 401k plan. I have just over $22,000 in my 401k account. If I take the 401K money and use it to pay down debt can you tell me how much of the 401k I will keep and how much I will lose in tax and penalties? -Steve |
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Steve,
Too much. That’s how much you’ll lose. I know it seems like your retirement money is just sitting there, but messing with it is messing with your future. I highly recommend that you consider a debt repayment program instead.
A credit counselor may be able to negotiate lower interest rates and smaller payments to help you pay down that debt. They can be reached at 800-762-2271. By the way, congratulations on your decision to take good care of yourself. Your health is your most valuable asset.
Susan |
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I currently owe about $4,000 in credit card debt. I have about $9,000 in a 401k. Should I withdraw the money from my 401k to pay off my credit cards? I no longer work for the company, so if I withdraw the money, it's all or nothing. What do you think I should do? -Conner |
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Dear Conner,
I highly recommend that you not only leave the retirement account alone, but keep adding to it! For one thing, it is your future on the line. For another, the penalties for cashing the account are severe (probably about 37 percent!) There may be another solution.
A nonprofit credit counseling agency can help you set up a plan to pay off that debt. Trained professionals are standing by at 800-762-2271.
Best of Luck,
Susan |
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I have a credit card balance too large to mention. I have a 401k and am considering taking out a loan on my 401k to pay these debts. Do you think this is wise? Or should I try real hard to keep on paying these cards with whatever money I have? I'm very desperate and stressed out! I can't think of any other alternative than bankruptcy, but I do not want to do that if at all possible.
-Nancy |
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Dear Nancy,
MMI has been helping consumers overcome debt for nearly 50 years. There is little that can surprise us. Trained counselors are there to help, not make judgments. Before you mess with your future by borrowing from your retirement, take an hour to talk with a counselor.
It is completely confidential and may alleviate your stress.
Susan |
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I have about $4,000 in my 401k plan, and I have about $3,000 in credit card debt. I am leaving my job to start with another company and I am faced with the choice of rolling my 401k over into my new company's plan or taking the penalty and closing it out to pay off my credit cards, then starting over with my new employer's plan. I am 28 and single. I know that the advice is to first get out of debt, then build up an accessible savings of two months' living expenses or so, then start saving for retirement. Would it be in my best interests to close out the 401k to pay off my debt, build up a safety net in savings, and then start contributing to the new 401k? Or would I lose too much by starting two years later? -April |
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April,
You definitely will lose too much by starting two years later. My suggestion is to not cash in your 401k plan. There are far too many negatives and not enough positives in cashing your 401k.
The first negative is you will have to pay income tax plus a 10 percent penalty, or a minimum of at least 20 percent in federal income tax on any early withdrawal. Hopefully, none of your credit card debt has an interest rate that high. The second negative is the chances are overwhelming you will not replace the $4,000 that you withdraw. The third is you would be starting later than you should in funding your retirement account. Instead of having to refund your 401k plan, concentrate on paying off your credit card debt. If the interest rate on your credit cards is around 18 percent, by paying $110 per month, you can be out of debt in about three years or $90 per month will get you out of debt in about four years.
Good luck with your decision,
Susan |
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My wife and I have just under $30,000 of unplanned debt on 4 credit cards. We have no other debts, and our combined gross income is about $80,000. I can take a loan from my retirement plan at work in which I have over $100,000 invested. A loan of about $30,000 is to be repaid to myself, pre-tax, and the interest also goes back into my own account. What are the bad points to this plan? If my employment with the company terminates, will I need to pay back the loan all at once?
Thanks!
-Doug |
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Doug,
Your solution sounds simple and it just might work. However, I’d like to play devil’s advocate for a minute to make sure you’re considering all angles. Ask yourself:
-If I’m having trouble making the debt payments, how will I repay my retirement fund?
-Am I aware of the penalties for not repaying the retirement fund?
-Since gains in the market cannot be timed, am I willing to lose some important investing opportunities?
-What got me into this situation in the first place and what can I do to make sure it never happens again?
You should also know that you must repay the loan with after-tax dollars and the interest is not tax-deductible. Also, if you leave employment, you may be subject to early withdrawal penalties that are very steep. Ask your human resources department for more information. If after considering all angles you still feel like borrowing from your retirement is a good solution for you, then I’d say it is.
Susan |
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