Withdrawing vs Borrowing From 401(k) to Pay Credit Card Debt…

8 Июн 2015 | Author: | No comments yet »
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Withdrawing vs. Borrowing From to Pay Credit Card Debt

New Frugal You,

I need advice. My credit card is becoming a problem. Ever they cut my hours at work, only been able to pay the This month, altogether my is $9,700. It’s been a little each month. thinking of making a withdrawal my 401(k) to pay off the credit cards. do it except for the penalties and the fact I just turned 40 so I’m to think about retirement. should I do?

— Nick

Nick,

Good question and one frequently asked. With the recovery lagging, many of us who are enough to have jobs nevertheless gone five without a raise or even reduced hours.

Money that we stashed in a 401(k) plan looks especially when we’re to make minimum payments.

So see if we can help you decide whether to that 401(k) to pay off your card debts.

Let’s by seeing what happens if you the money out of your 401(k) and use it to pay off card balances.

Any money you take out will be subject to income tax. For illustration, assume that you’re in the 25% tax (income from $36,251 to for single filers).

And, you qualify for a hardship exception, also pay a 10% early withdrawal

It’s unlikely that you for a hardship. According to the Internal Service, a qualifying hardship is one in you face immediate and heavy defined as: (1) certain medical (2) costs relating to the purchase of a residence; (3) tuition and related fees and expenses; (4) payments to prevent eviction from, or on, a principal residence; (5) … or expenses; and (6) certain expenses for the of damage to the employee’s principal

You haven’t said you face one of qualifying expenses, so 35% of any money you will probably go to the IRS. also assume that you to end up with $10,000 (the is much easier to illustrate).

The to determine what to withdraw is the of money you want ($10,000) by the percentage of the withdrawal you get to keep (in case 1 minus 35% = 65%). So divided by .65 = $15,385. You’ll to take out more than from your 401(k) to pay off the

If you do that the benefits are clear. You have that credit balance haunting you each But the costs are harder to see.

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because you won’t face the until you retire. To illustrate, assume that you were to earn 5% on that money if you it in the 401(k). At that rate, the would double every 14 So by the time you retire in your 60s, it would have two times and would be worth $60,000.

Most retirement say that you can safely take 3% of your principal each in retirement. So that $60,000 be about $1,800 per year or a month for the rest of your and still leave the original as an inheritance for your children.

Let’s try looking at a different Suppose that instead of a withdrawal you choose to borrow your 401(k). Because a loan and not a withdrawal you won’t pay on it.

But there will be an interest applied to the loan. Check your plan administrator to out what the interest rate be.

It is likely that your loan will have a interest rate than you’re paying on your cards. Your human department at work should be to tell you what your payment will be. You can compare to your current credit payments.


However, those lower don’t come without a Generally you need to repay the 401(k) loan amount if you your job. So you’re in your job until the loan is And a layoff could be a real

Another possibility would be to out nonprofit credit counseling. If you they can get a reduced interest and a lower payment from card issuer for you. You can them through the National for Credit Counseling or Association of Credit Counseling Agencies .

A option would be to find a way to up for the lost hours via a part-time Use the extra earnings to pay down debts.

Ultimately that might be the option. If your expenses exceed your income continue to have a debt Even if you wipe the slate today, you’ll only building a new balance next which will only you to the situation in which you are now.

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