Help me think through this financial decision..

[home4school]

Over the past several years, we have acquired debt from different places. There were many medical bills for several different things, payment on a bobcat which is necessary for where we live, and a year and a half left on a truck (which my dh needs for work).

 

I did a stupid thing and rolled the payment of the bobcat onto an introductory 0% rate card with the hopes of having it paid off before the rate increased. That didn't happen and I have had to put other things on the card so the balance has actually gone up instead of down.

 

We are trying to lower our monthly expenses, so we don't run so short some months and have to put unexpecteds on the card.

 

We could take a loan against my dh's 401k, pulling out about 1/4 of what's in there and pay ourselves back 4.25% int over 4 years. This would pay off all debt except our home and lower our monthly payments by about $350. All debt would then be gone at the end of the four years, since I will cut up said card and hopefully never use it again.

 

But, this goes against what I've always thought that you should never touch your retirement. My dh, on the other hand, wants to just pull out the money, pay the penalties, pay everything off (except the house) and have no monthly payments on that debt. I don't like this at all. I see his reasoning of no monthly payments on debt and hopefully we could put the money back quicker, but we would lose so much as well. His reasoning is we lost more than this back in the 1990s when the market tanked. (We've since moved the $$ into more low risk.)

 

I've tried to pay this debt off for years, but we run so close each month, unexpecteds throw us. I've sold big ticket things, had yard sales, etc. trying to throw as much as I can at this, but it doesn't go away. My husband works OT when possible, but a job for me is out right now. I homeschool two children:tongue_smilie: and my 82yo, in failing health mother lives with me so I can care for her. My plate is running over! With the loan, at least it would be gone in 48 months plus we would have a bit extra each month, just in case.

 

Ok, let me have it, how stupid is this idea?

[Trish]

Well, one way to look at it is that you're paying the exorbitant interest rate on your debt so you can maintain 4.25 percent on your saved money.

 

I'm in the camp of the economy heading for such a bad place that retirement is the last thing any of us will need to worry about unless you're already 64, but that's another issue.

[AlmiraGulch]

Most financial experts would advise against borrrowing from your 401(k). You may be paying yourself back with interest, but in most cases the money would be earning more if you left it invested.

 

That said....I'd do it. It's only 1/4 of what you have in there (so the other 3/4 would still be invested), and you'd have a set repayment time so the debt would finally be gone for good, AS LONG AS you actually do cut up the cards and don't use them again. The money you've been spending on card payments and interest could then go into savings or some other form of investment. Not to mention the peace of mind you'd have from getting out from under your debt.

 

Just my two cents.

[jplain]

All debt would then be gone at the end of the four years, since I will cut up said card and hopefully never use it again.

"Hopefully never" is not convincing enough. Be convinced! :)

 

I say go for it, as long as you've got the discipline to keep to a strict budget. There are much worse things you could do than take a loan from the 401K.

 

Do you have an emergency fund?

[Jennifer3141]

We have pulled money out of our 401k as a loan and it worked AWESOME. After watching the 401ks just totally tank out and stay there for YEARS, we decided to get out of debt. The interest we pay on the loan is more than we were making on the stock market consistently anyway!!! :D

 

We've pretty much given up on the 401k. There's some in it but we've switched our goals to paying off the house, buying more land, and investing more conservatively. I actually think 401ks are a scam corporate America sold us all on and then pillaged the stock market at will.

 

I'm also unhappy with the lack of regulation. When we left DH's very hostile first employment, I was gobsmacked to discover that his employer could have blocked us from rolling over the money if they had written the plan that way. I will NEVER give any employer control over where our money goes again.

[TXMomof4]

I know you're not supposed to touch 401K money. But if the option is paying a credit card 14% interest or paying yourself 4% - well, is that really too hard?

 

Now, do NOT take it all out. If you close your 401K and pay the penalties you'll be losing more than you're gaining.

[RahRah]

I'd do it ONLY if you're certain you'll not accumulate debt again on the zero-balance credit cards.

 

Doing the math, it makes sense to pay it off using your retirement funds since you'll replace those to yourself over four years. It isn't like you're taking the money, paying off the debts and not putting it back - you're putting back over a period of time, so you're not losing it from your retirement.

 

It makes sense from a long-term perspective because, let's pretend your credit card debt is $25,000.....if it'll take you 10-years to pay that off as you're trying now, at an interest rate of 12%, you'll pay to the credit card company more than $18,000 in interest - taking your principle and interest on the debt you've accumulated to $43,000....so what cost you $25,000, now cost you $43,000.

 

On the flip-side, if you take out $25,000 from retirement to pay off your debts, over 4-years of repayment, at 4.25%, you're looking at paying back into your account the $25,000 plus about $2,500 in interest over that period - so your $25,000 is going to be replaced with $27,500. Looking at the markets right now, I doubt your portfolio is rising at the same rate - but even if it is, or it's doing better, you are NOT making enough in interest to cover your losses to the credit card interest!

 

Anytime your interest payments exceed what you're earning, it makes sense to eliminate the debt first, even if it means reducing your saved funds because the saved money isn't earning enough to justify it sitting there while you're spending more to pay someone else. With the retirement account, you'll be paying yourself, not a credit card company.

 

Just my two cents!

[Lolly]

I don't think it is stupid at all.

[jenlaw31]

I would. With gas prices soaring, it will be nice to have the extra cash each month.

[Chris in VA]

I'd pay off the debt. The peace of mind would be worth it.

Cut up the card.

Do you have a budget?

[elfgivas]

i would give myself a month to see if i could do it. ie. i would cut up the card now, and any other cards i had except one. i would put that one someplace where we could use it when credit cards were really necessary. if i used it, i would that very same day transfer the money from the bank account to the visa account.

 

i would draw up a budget and follow it.

 

if i could live that way for a month, every day, then i would have some hope that i could not slide back, and would go for it.

 

fwiw,

ann

[Tap]

Have you checked to see if you can take a loan out for this reason? I think most 401Ks only allow you to take the money out for a few specific reasons like paying for college, home loan, medical bills (I don't know if this extends to payments on medical debt already paid for with a cc).

 

Have you checked to see if your employer allows it? I assume since you know the interest rate, you have checked into this. Not all 401ks can be drawn against.

 

Do you know that if your dh loses his job while you have the loan, you will have 60 days to repay the entire loan and if not repaid in that time, it is distributed like a cash out, and you pay all the penalties and taxes in that calender year?

 

Do you know that the payment is taken out of your paycheck so there is no wiggle room for when you repay it?

 

What other options have you looked at? Personal loan? Home loan? Calling the cc company to lower the interest rate?

 

What kind of interest are you currently paying? If it is low, instead of taking out of your 401K, can you stop making payments (leaving in any matching amounts by employer) and use that money to pay extra on the loans instead?

[home4school]

"Hopefully never" is not convincing enough. Be convinced! :)

 

I say go for it, as long as you've got the discipline to keep to a strict budget. There are much worse things you could do than take a loan from the 401K.

 

Do you have an emergency fund?

 

I say "hopefully", well bc, who knows what's coming around the corner!

I do have a budget, I coupon, we don't spend lavishly. We live a pretty moderate lifestyle.

 

We have about $2700 put back for an EF.

[home4school]

Have you checked to see if you can take a loan out for this reason? I think most 401Ks only allow you to take the money out for a few specific reasons like paying for college, home loan, medical bills (I don't know if this extends to payments on medical debt already paid for with a cc).

 

Have you checked to see if your employer allows it? I assume since you know the interest rate, you have checked into this. Not all 401ks can be drawn against.

 

Do you know that if your dh loses his job while you have the loan, you will have 60 days to repay the entire loan and if not repaid in that time, it is distributed like a cash out, and you pay all the penalties and taxes in that calender year?

 

Do you know that the payment is taken out of your paycheck so there is no wiggle room for when you repay it?

 

What other options have you looked at? Personal loan? Home loan? Calling the cc company to lower the interest rate?

 

What kind of interest are you currently paying? If it is low, instead of taking out of your 401K, can you stop making payments (leaving in any matching amounts by employer) and use that money to pay extra on the loans instead?

 

Yes, we can borrow for this. If he were to lose his job, his employer offers a "coupon book" so we could continue payment on the set schedule.

 

I haven't looked into any other options. I

 

The interest shot up after the mess last year to 11%. We've been getting the 0% intro invites lately, but I'm just fed up with ccs. They just never seem to go away.

 

I just want to be debtfree.:(

 

Thanks for all the replies. Sounds like noone agrees with dh's idea to just pull it out and take the penalties, even though we would have no payments, right?

[Margo out of lurking]

Ok, let me have it, how stupid is this idea?

 

I think it's wishful thinking. What happens the next time you have any unexpected expense? More medical bills, car repair, home repair? You'll be in the same place you are now, but with no "back up." If you have no money to clear this current debt, how will you have extra money to repay the 401k loan?

 

If your dh withdrew his 401k money (instead of taking it out as a loan), you will be taxed on it in addition to the penalties you mentioned.

 

Does your dh have an occupation where he can pick up extra work on weekends, or is his schedule consistent enough where you can find a job for one day a week when he's home with your kids? It seems that the problem isn't the debt as much as your income is not meeting your expenses at this point. Since you've already said you've cut your expenses back, maybe it's time to look at increasing your income until the two are better balanced.

 

Is there any way that you can hold out for another year and a half, when you'll expect to have the truck paid off? You can then direct that money first toward a backup $1000 emergency fund and then pay off the existing debt. It seems like that would take a lot less than four years total.

 

:grouphug:

[home4school]

I'd do it ONLY if you're certain you'll not accumulate debt again on the zero-balance credit cards.

 

Doing the math, it makes sense to pay it off using your retirement funds since you'll replace those to yourself over four years. It isn't like you're taking the money, paying off the debts and not putting it back - you're putting back over a period of time, so you're not losing it from your retirement.

 

It makes sense from a long-term perspective because, let's pretend your credit card debt is $25,000.....if it'll take you 10-years to pay that off as you're trying now, at an interest rate of 12%, you'll pay to the credit card company more than $18,000 in interest - taking your principle and interest on the debt you've accumulated to $43,000....so what cost you $25,000, now cost you $43,000.

 

On the flip-side, if you take out $25,000 from retirement to pay off your debts, over 4-years of repayment, at 4.25%, you're looking at paying back into your account the $25,000 plus about $2,500 in interest over that period - so your $25,000 is going to be replaced with $27,500. Looking at the markets right now, I doubt your portfolio is rising at the same rate - but even if it is, or it's doing better, you are NOT making enough in interest to cover your losses to the credit card interest!

 

Anytime your interest payments exceed what you're earning, it makes sense to eliminate the debt first, even if it means reducing your saved funds because the saved money isn't earning enough to justify it sitting there while you're spending more to pay someone else. With the retirement account, you'll be paying yourself, not a credit card company.

 

Just my two cents!

 

Great answer. I did the loan model at the 401k site, but I just wanted to be sure this wasn't completely off the wall. We've made some bad financial decisions in the past.

[home4school]

I would. With gas prices soaring, it will be nice to have the extra cash each month.

 

 

That's something else I'm afraid of. It seems no matter what we do to eliminate things and free up extra money, we never see it. I cut our car insurance by half each month by switching companies, but I don't "see" that $$$ each month and it was about $75. I'm afraid we'll do this and still not be any better off each month.

[home4school]

I think it's wishful thinking. What happens the next time you have any unexpected expense? More medical bills, car repair, home repair? You'll be in the same place you are now, but with no "back up." If you have no money to clear this current debt, how will you have extra money to repay the 401k loan?

 

If your dh withdrew his 401k money (instead of taking it out as a loan), you will be taxed on it in addition to the penalties you mentioned.

 

Does your dh have an occupation where he can pick up extra work on weekends, or is his schedule consistent enough where you can find a job for one day a week when he's home with your kids? It seems that the problem isn't the debt as much as your income is not meeting your expenses at this point. Since you've already said you've cut your expenses back, maybe it's time to look at increasing your income until the two are better balanced.

 

Is there any way that you can hold out for another year and a half, when you'll expect to have the truck paid off? You can then direct that money first toward a backup $1000 emergency fund and then pay off the existing debt. It seems like that would take a lot less than four years total.

 

:grouphug:

 

I've thought about all that, too. There's really no extra work outside the OT he gets. When he gets OT, its great $$, so he needs to be able to do that when its available. There again, needing him to be available limits me.

 

On paper, our budget works with $$ left. In real life, it doesn't happen. I've checked Dave Ramsey out of the library again. We used to do the envelope system early in our marriage in the 90s. I think we should give that a try again to really "see" where its trickling out each month.

 

I've thought too about holding on til the truck's paid, but those *^** ccs just don't seem to go down, much less away. It would be nice like a PP said to have "peace of mind" that the ccs are gone and we are paying ourselves.

 

I just don't know what the right thing to do is. I don't want to mess up our retirement, but we might not even be here then.

[home4school]

Just happened to think, I'm driving a 12 yo van with 150,000 miles on it. Won't be long til it dies. There's another payment.

 

Its just a losing battle, it seems.:glare:

[abacus2]

I wouldn't use retirement money for this. This is a "routine" struggling to make a budget work with high expenses problem, it isn't a life or death or lose the house kind of crisis. I would look into seeing if you can get a new loan against the bobcat to get its debt off the high interest credit cards. If things were really bad, I would miss credit card payments rather than touch retirement money. Have you read Dave Ramsey's Total Money Makeover? It was very helpful to us in getting better control of our budget and paying off debt.

[FlyingMOm]

We've done the Dave Ramsay course so I am pretty anti-debt. That being said, I'd go for it.

 

But- I would also cut up your credit card. I KNOW how hard this is- dh didn't want me to use your debit card for online purchases and without a cc how do you buy something from Amazon, make a hotel reservation, etc. So- we kept the cc & ended up getting back in debt & paying it off several more times.

 

Finally, about 2 years ago, we made the jump and got rid of all cc's. We opened a secondary checking acct. at our bank but made sure it was not linked to our primary acct. Now if we want to make a hotel reservation, buy something from Amazon, etc. I do an online automatic transfer from our primary acct. to the secondary acct. & then use the debit card for that acct. to make the purchase. I don't leave more than $5 or so in that acct. on a regular basis.

 

I can tell you that it was a rough adjustment at first- so many things I thought I "needed" or "deserved" or "would pay off that purchase next month" could no longer happen. I had to learn to just... wait. Getting rid of our cc was the best thing we've done & I'd really encourage you to do the same, so you don't wind up in the same place again 5 years down the road.

[Starr]

I would worry that those same little things that have come up and caused you to use your card would continue. You really need to look at the big picture and see if you are able to live within your income.

[LibraryLover]

Most financial experts would advise against borrrowing from your 401(k). You may be paying yourself back with interest, but in most cases the money would be earning more if you left it invested.

.

 

Not always. Sometimes you can make more by paying back. Check the history, although things are really in flux. How far from retirement are you?

 

 

Never mind me, I read the thread, and this is the best answer. lol Thanks, RahRah.

 

 

 

--Doing the math, it makes sense to pay it off using your retirement funds since you'll replace those to yourself over four years. It isn't like you're taking the money, paying off the debts and not putting it back - you're putting back over a period of time, so you're not losing it from your retirement.

 

It makes sense from a long-term perspective because, let's pretend your credit card debt is $25,000.....if it'll take you 10-years to pay that off as you're trying now, at an interest rate of 12%, you'll pay to the credit card company more than $18,000 in interest - taking your principle and interest on the debt you've accumulated to $43,000....so what cost you $25,000, now cost you $43,000.

 

On the flip-side, if you take out $25,000 from retirement to pay off your debts, over 4-years of repayment, at 4.25%, you're looking at paying back into your account the $25,000 plus about $2,500 in interest over that period - so your $25,000 is going to be replaced with $27,500. Looking at the markets right now, I doubt your portfolio is rising at the same rate - but even if it is, or it's doing better, you are NOT making enough in interest to cover your losses to the credit card interest!

 

Anytime your interest payments exceed what you're earning, it makes sense to eliminate the debt first, even if it means reducing your saved funds because the saved money isn't earning enough to justify it sitting there while you're spending more to pay someone else. With the retirement account, you'll be paying yourself, not a credit card company.

 

Just my two cents! ---

Edited March 15, 2011 by LibraryLover

[Tess in the Burbs]

We did it. Pulled the 401k money and got out of debt. We have no regrets. None. Yep, we have to save a lot now, but guess what? We have the money to save. And we are both less stressed about bills and now when dh goes to find a new job in the future he won't have to turn down a good job b/c it doesn't pay enough to pay our debts. We actually took out most of ours as we had a lot of debt, but it's ok. I wish we had done it years ago before the debt got that high! We closed all but one credit card account. That one has been used but only if I can pay it with that upcoming paycheck. If not, then I don't use it.

 

It's a hard decision to make, and I dread taxes next year, but we would do it all the same if we could go back...only we would have done it years sooner.

[LibraryLover]

Were you able to make money paying pack on your 401k? That often happens (Not always, of course. lol)

 

We did it. Pulled the 401k money and got out of debt. We have no regrets. None. Yep, we have to save a lot now, but guess what? We have the money to save. And we are both less stressed about bills and now when dh goes to find a new job in the future he won't have to turn down a good job b/c it doesn't pay enough to pay our debts. We actually took out most of ours as we had a lot of debt, but it's ok. I wish we had done it years ago before the debt got that high! We closed all but one credit card account. That one has been used but only if I can pay it with that upcoming paycheck. If not, then I don't use it.

 

It's a hard decision to make, and I dread taxes next year, but we would do it all the same if we could go back...only we would have done it years sooner.

[home4school]

We did it. Pulled the 401k money and got out of debt. We have no regrets. None. Yep, we have to save a lot now, but guess what? We have the money to save. And we are both less stressed about bills and now when dh goes to find a new job in the future he won't have to turn down a good job b/c it doesn't pay enough to pay our debts. We actually took out most of ours as we had a lot of debt, but it's ok. I wish we had done it years ago before the debt got that high! We closed all but one credit card account. That one has been used but only if I can pay it with that upcoming paycheck. If not, then I don't use it.

 

It's a hard decision to make, and I dread taxes next year, but we would do it all the same if we could go back...only we would have done it years sooner.

 

You pulled it completely out? Can you tell me about the penalties? There's the 20% tax and the 10% early withdrawal, right? So we would automatically lose 30%. Also, it could affect our taxes when filing time comes.

 

My dh is still pushing his idea of pulling out about what would amount to 1/3, in spite of all the penalties. He says he'd rather do it that way and be debtfree, not even needing to pay himself back. He thinks the money we save in monthly payments that way, we can build the 401 back up more quickly.

 

If we eliminated the debt and didn't have the payment back to the 401k, it would free up around $800/mo. If we borrow and pay ourselves back, we would free up around $350/mo but not lose anything really and we would only be taking out about 1/4.

 

I just do.not.know. I just keep thinking about how much we would lose that way. He reasons the market could drop and we could lose it anyway. This is making me sick to my stomach.

 

Thanks for the insights.

[Tree House Academy]

We did this once - we were young and actually took the entire 401K and paid ourselves to debt free. It was the best decision we ever made (not much in the 401K either at that time...would NEVER do that now with all we have invested!). I say, go for it.

 

The way I look at finances is we have no promise of tomorrow. If you can get out of debt and live more freely and happily, then do it. Don't completely remove all of your 401K, but 1/4 is not a ton...and like I said...who knows if most of us will even live to use the 401K.

[home4school]

We did this once - we were young and actually took the entire 401K and paid ourselves to debt free. It was the best decision we ever made (not much in the 401K either at that time...would NEVER do that now with all we have invested!). I say, go for it.

 

The way I look at finances is we have no promise of tomorrow. If you can get out of debt and live more freely and happily, then do it. Don't completely remove all of your 401K, but 1/4 is not a ton...and like I said...who knows if most of us will even live to use the 401K.

 

He's talking about taking out 1/3 completely. We would lose at least 30% of that to penalties. But, we would free up the $800/mo.

 

I don't think I'd have a problem with it if it weren't for losing the $$$ to penalties. That's like flushing it down the toilet!

 

BTW, he's 49, will be 50 this year. So, he says he's worked for 20 yrs to build up this much and he's still got another twenty ahead before he can retire. You can withdraw at 60 though can't you?

[home4school]

:bigear: