using retirement plan

[Brett Hartwig]

My wife wants to use some of her retirement plan (403B) to pay off our credit card bills and have a clean slate. I am not sure we should be doing this. She says she would have plenty of time to make it back up, she is 34, been working at this job for a couple years. What is the general opinion on this?

 

[Casey B]

penalties and fees! You'll be taxed and probably have to pay penalties. Make sure you are really sure before you do.

 

[Kevin Palmer]

Here is what I did. I had about 9000 dollars of various debt that I wanted to get some control over, (mostly credit cards and things to that nature).



I found a credit card that offered 1 year interest free for any and all transfer amounts from other debt, in my case, the other debt was credit cards.



So now I get one bill where I have a mini mun payment of something like $72.00.



I am paying 500 to 800 on every bill and knocking the hell out of my debt with no interest stacked against it.



There are several cards out there offering this type of opportunity.



Once the year is up, it goes to 9.99% fixed which is still a pretty good deal in todays world.

 

[George C]

Myself I wouldn't do it because even though you may be paying a lot of interest and eventually paying more money at least you already have the retirment money saved. If you take it out you may never put it back. Also, those are usually loans and you have to pay that back anyway. Like C said, there may be big fees and penalties especially since she is young.



If you have a lot of debt and it's too much on a monthly basis you may not have a choice.



George

 

[TomT]

Of course if your in over your ass in credit card debt then your screwed either way. First thing you need to do is shred ALL of your credit cards.

You may look into a home equity loan.

 

[Jake Levin]

See if she can take a loan off of her retirement plan. You can then consolidate the debt down to 1 monthly payment at a lower interest rate then the credit cards are at. You won't have to pay any penalities or taxes this way and you have no choice but to put the money back. The only thing you lose is the gains that that money would have made if it was in your account. The biggest hurdle in doing this is she can't, I repeat ABSOLUTELY CAN'T go rack up the credit cards again otherwise she'll be paying the credit cards and the loan and that might sink the boat.

 

[TracN Jack]

You will loose like 40% up front cashing in early on a 401k/403b tax deferred retirement account. Not reccomended unless it is a last resort.



Look at why the balance got too high.. and correct the problem. It will get right back there quickly if not. I.e. distroy the credit cards, get a better interest rate, pay it off..



Do you own a home? you might be able to do a equity line of credit. But only if you are disiplined enough to not treat it like a credit card.

 

[Bill V]

Do you own a house? Depending on the situation, you might want to consider a 2nd mortgage (or a refinance of the first mortgage, with some cash pulled out).

 

[WXMotorSports DecalsPartsAccs]

Bad bad idea. You will pay lots of fees and penalities.



Bill V has the right idea AND you can deduct the interest on your taxes. You can't do that if you take the cash out of the retirement plan.



Then take the CC away from her or you will be in the same boat down the road again.

 

[Jenn D]

I second the statement that you will lose a LOT of that 403b money. When we purchased our house, I withdrew the money from my 403b. It was almost chopped in half after all was said and done. It sucks because my 403b was not making a whole heck of a lot at the time...



Would I do it again, yes, most definately, but it still sucks. Make sure there is no other possibility before you do it. For me, at the time, there were no other options. It was the difference between getting a house and not. Now, I have triple the amount the 403b was worth in equity.

 

[Gene Zenk]

I know a few people that have borrowed (not cashed in) from their 401k for home purchases, remodeling and other expenses. From what I understand, you are basically making a loan against yourself. You are essentially paying yourself the interest for borrowing against yourself.



I do not know if there are any penalties as you are not cashing in but I'm guessing there are some processing fees of some sort.

 

[Aaron Yarbough]

DON'T DO IT! You can probably consult any financial advisor and they will strongly discourage you from this. The excessive taxes (because of pre retirement withdrawal) and penalties alone will be so high that it is not worth it whether you plan to pay yourself back or not.

 

[Johnny O]

You will loose like 40% up front cashing in early on a 401k/403b tax deferred retirement account. Not reccomended unless it is a last resort.

Bad idea because the fees and tax penalties will really whack you. Myself, I pay the minimum on all my cards but one and I pay that one $500 a month. Then when one is paid off, I pay $500 on another one, and so on.

I sold my van today, so that's $1400 that will go on the one I'm already paying $500 on.

Basically, last year was a bad year although biz is good so far this year. Also my wife quit her job almost two years ago to start her own company and went from $38k a year + benefits to $12k last year and I pay $200 a month to AFLAC.

Then there's that pesky $1000 a month in child support I pay, only a little over a year to go. Stuff be paid off REAL quick once I'm done with that.

[/rant]

 

[Thomas Rogers]

Here is my take:



I'm not sure about a 403b, but most 401K plans allow you to take a loan against your account. You pay the loan back typically via direct withdrawal in your pay, and the interest you pay goes back into the account...you pay yourself interest.



Now, given the current market, depending on your funds, that MIGHT not be a bad deal.



But, you definately DO NOT want to withdraw the money and have to pay all those tax penalties. Do not do that.



The best way to get out of credit card debt AND keep you out of it is to:



a) make a realistic budget and stick to it



b) put your cards "on ice"...literally freeze them in blocks of ice in your freezer, that way you have them in an emergency



c) take on a 2nd (or 3rd) job, part-time, to increase your income so you can pay down the debt. That does two things: 1. it reduces your liesure time which helps to save. 2. it reinforces that you have to WORK for you past lifestyle...nothing is free.



d) Roll the balance of the cards over into a card that charges 0% or some other low rate for 6 or 12 months, do it again in 6 or 12 months (especially if there are no roll-over fees).



Good Luck.



TJR

 

[Gavin Allan]

Think about what you are saying here! If he is in debt up to his eyeballs, the LAST think he needs is another loan, such as a home equity, another credit card, etc. Stop focusing on the sunk costs of the debt, and start focusing all attention on paying it off! You can do this by two ways: Cut your expenses and raise your income.



Do what Dave Ramsey says: get a second job and live on rice and beans for a while. Pay that **** off!



Oh, and Tom T said it best: Shred all your credit cards now and never use them again.



Cashing in a retirement plan or insurance policy is plain dumb, even when trying to pay off debt.

 

[Michael Hale]

Your actual IRS fees are your standard tax rate plus a 10% early withdrawal penalty.

 

[Richard L]

You will pay a 20% tax when you take the money out of the annuity plan, and then if you/she is under 59 1/2 years old, you will pay an additional 10% pentalty.



A better alternative may be to get a home equity loan. Interest would be a lot lower than credit cards and you don't have to pay the high taxes and pentalties for early withdrawl.



While your wife is a youthfull 34 years old, she will be suprised at how fast 20 years clicks off, and it's going to be very hard to justify taking money out of retirement with good interest rates and employers matching contributions. It will cost you a lot more than just taxes and pentalties in the long run.



It might be better to put less money into the 403B and use that money to pay down the credit cards in big chunks, starting with the highes intrest rate card. When that card is paid off, cut it up and take the money you paid on that card and put it towards paying off the next highest intrest rate card, etc. You will loose less money and pay less interest that way, and your retirements is still safe and growing.



...Rich

 

[Bill V]

Gavin, I agree that they need to get them paid off, and stop spending--but until its paid off, the debt exists, and letting it sit with the credit card companies at 19% is a bad idea. Transferring that into another loan--home equity or whatever--which is at a lower interest rate is the right thing to do.



And then immediately follow that with the all-out effort to stop the spending and pay off that transferred debt which you suggest.

 

[peter barone03]

If you own your own house you should be able to take out an equity line of credit which you can lock in for a fixed rate. How it works is you have a credit line you write a check against your established line.

Then as you pay it off you have that money available to use again.

You have to check with your Bank for details.My rate is locked in at 5.75% .

Just a thought.



Pete