Should I cash out my 401k to pay off debt?

[Brian4Liberty]

See if you can borrow money from the fund. I have done that. You have to repaid it, but all the money and interest goes back into your fund.

Now that's a great idea!

If that doesn't work, can you consolidate into a cheaper loan? Most credit card rates are ridiculous.

In general, I wouldn't recommend paying off a low-interest loan right now...

 

[Josh_LA]

Now that's a great idea!

If that doesn't work, can you consolidate into a cheaper loan? Most credit card rates are ridiculous.

In general, I wouldn't recommend paying off a low-interest loan right now...

credit cards are not low interest, or that wouldn't be a question.

i don't know enough about IRAs and 401k, but I WOULD NOT borrow money from it, why? Because why pay interest on it when you at worst pay a 10% penalty?

 

[Josh_LA]

If I had significant credit card debt and it was variable rate, I'd be inclined to pay off that debt. I'd leave fixed debt alone; massive inflation will take care of that for you.

let's see massive inflation take care of you when you don't have a job.

 

[EddieG]

That debt will be the least of his concerns. Food prices will be a bigger problem.

 

[Brian4Liberty]

don't know enough about IRAs and 401k, but I WOULD NOT borrow money from it, why? Because why pay interest on it when you at worst pay a 10% penalty?

You are paying the interest to yourself when you borrow from a 401(k). It's like your 401(k) has an investment option of "loan money to myself at x%". Your 401(k) makes money from the deal.

No penalties. No loss of funds in your 401(k).

 

[Josh_LA]

You are paying the interest to yourself when you borrow from a 401(k). It's like your 401(k) has an investment option of "loan money to myself at x%". Your 401(k) makes money from the deal.

No penalties. No loss of funds in your 401(k).

what if your 401k remainder depreciates? you'll be paying interest on yourself for something that's shown to lose value?

 

[Brian4Liberty]

what if your 401k remainder depreciates? you'll be paying interest on yourself for something that's shown to lose value?

By 401k "remainder", do you mean the excess money in your 401(k) that you don't loan to yourself? You can usually invest that in anything, but it depends on your 401(k). If you're lucky you have the option of investing in GDX...

401(k)s are great in that they sometimes having employer matching, and you don't have to worry about IRS bs for all your transactions. No difference between a short and long term capital gain, no end of year tax paperwork. Buy and sell all you want. Big caveat is the options your 401(k) plan gives you for investing. Many have all the options of a standard broker, but some may be limited. You may have idiots at your company choosing/running the 401(k), so always make sure you have unlimited investment options.

 

[satchelmcqueen]

i say cash it out. i never got into the thing myself. always feared a crash in the economy, plus the fees that rob you blind if you ever do take it out. JMO

 

[Josh_LA]

By 401k "remainder", do you mean the excess money in your 401(k) that you don't loan to yourself? You can usually invest that in anything, but it depends on your 401(k). If you're lucky you have the option of investing in GDX...

401(k)s are great in that they sometimes having employer matching, and you don't have to worry about IRS bs for all your transactions. No difference between a short and long term capital gain, no end of year tax paperwork. Buy and sell all you want. Big caveat is the options your 401(k) plan gives you for investing. Many have all the options of a standard broker, but some may be limited. You may have idiots at your company choosing/running the 401(k), so always make sure you have unlimited investment options.

ok, let's play some numbers.

Let's say I have $22K in my 401k today

I borrow out $10K of it, leaving $12K in it.

If I were to pay it back 5 years later, I'd owe 5 years worth of interest (5% or more I assume)

But what if my 401k depreciated? (is that a possible scenario?)
Now my originally $12K+ portfolio is worth only $9K
If that were the case, wouldn't I have been better off taking a one time penalty of 10%?

Why would I want to pay back + interest into this losing portfolio?

 

[Brian4Liberty]

ok, let's play some numbers.

Let's say I have $22K in my 401k today

I borrow out $10K of it, leaving $12K in it.

If I were to pay it back 5 years later, I'd owe 5 years worth of interest (5% or more I assume)

But what if my 401k depreciated? (is that a possible scenario?)
Now my originally $12K+ portfolio is worth only $9K
If that were the case, wouldn't I have been better off taking a one time penalty of 10%?

Why would I want to pay back + interest into this losing portfolio?

I believe you pay back your 401(k) loan on a schedule (like a mortgage or credit card).

Assuming that you have a good 401(k) with broker-style options, you can invest in any portfolio you invest in outside a 401(k). It's up to you to invest so you don't lose too much money. You can play it super-safe (money market or some bank-style money fund), or you can take some risk. There's risk in or out of the 401(k). Your $12k portfolio could grow to $50k in 5 years. I invest in GDX, USAGX, CEF, GLD, SLV, SLW, etc. I expect that to go up...

 

[Danke]

I believe you pay back your 401(k) loan on a schedule (like a mortgage or credit card).

Yes.

 

[RonPaulCentral]

After mortgage and monthly bills, I am spending the majority of my paychecks paying down credit card debt (totalling about $19K).

I have about 22,000 in a 401k. Because I have almost no faith in the stock market for the forseeable future, I am considering cashing out my 401k to pay off my debts. If I do so, I will be able to put about $1000 into saving and/or other investments each month.

I understand that I'll pay a big penalty on cashing out, meaning I'll actually get a little more than half of that $22,000. But, it will nearly end all my debts (other than mortgage).

Most sites I've looked at strongly recommend against doing this, but I'd like to hear from folks here that are outside the standard government/keynesian mode of thought.

I appreciate any input. Thanks!

1) Take a loan against the 401K
2) Pay the credit cards
3) Pay back the 401K loan

Most 401K programs will allow you to borrow against the funds, many times at no interest. Many time there is interest charged BUT it is completely credited back to you (the interest) upon full repayment of the 401K loan.

Taking the 50% loss is crazy to just "give away" up front. Your holdings in the 401K would have to collapse 50% to equal what you are just willing to give away.

By doing what I am talking about you will be eliminating all the interest on the credit card debt while still being able to maintain the 401K and not take a huge up front loss.

Good luck.

 

[Zippyjuan]

A little info on borrowing from your 401k
http://www.smartmoney.com/personal-finance/debt/should-you-borrow-from-your-401k-or-403b-9657/

Should You Borrow From Your 401(k) or 403(b)?
·Click here to see the worksheet below
THESE DAYS, more than 85% of workers with 401(k)s can borrow from their plans. And a growing portion of 403(b) plan participants can too. If you've been diligently socking away a portion of your salary over the past few years (and you've had a match to boot), chances are that puts a lot of cash at your fingertips. It certainly doesn't make sense to use this money for luxuries like a backyard swimming pool or a new car. But does it make sense to tap your 401(k) or 403(b) to pay off a loan?

Typical plans allow you to borrow up to half your vested balance, but not more than $50,000. (Some plans might restrict borrowing to specific reasons, like a home purchase, education or medical expenses.) You usually must pay the money back, with interest, over five years. But, because you are paying the interest to yourself, it isn't an additional cost. Just think of it as forced savings. If you don't repay the loan, you will owe income tax and a 10% early withdrawal penalty.
Sounds like a pretty good deal, right? Well, there are a couple of big drawbacks. First, you are giving up the tax-free compounding of the money you withdraw. That could lead to a signficantly smaller nest egg come retirement. Also, if you leave your current employer for any reason, you will probably have to pay the loan back immediately or face taxes plus a penalty.

So in your case, it seems that you could borrow up to $11,000 and have to repay that back to the account within five years (unless you change employers in that time in which case you have to pay it all back or face the penalties as if you had withdrawn it).

 

[clowns789]

1) Take a loan against the 401K
2) Pay the credit cards
3) Pay back the 401K loan

Bingo!

 

[Zippyjuan]

Of course this all assumes you do not use the credit card for anything anymore. If you borrow from your 401k but continue to charge you are only digging in deeper while wiping out your savings for an emergency.

 

[Josh_LA]

I believe you pay back your 401(k) loan on a schedule (like a mortgage or credit card).

Assuming that you have a good 401(k) with broker-style options, you can invest in any portfolio you invest in outside a 401(k). It's up to you to invest so you don't lose too much money. You can play it super-safe (money market or some bank-style money fund), or you can take some risk. There's risk in or out of the 401(k). Your $12k portfolio could grow to $50k in 5 years. I invest in GDX, USAGX, CEF, GLD, SLV, SLW, etc. I expect that to go up...

how safe is safe?

is it as guaranteed as CD?

If not, haven't most people already lost some of their money as a result?

 

[Josh_LA]

Of course this all assumes you do not use the credit card for anything anymore. If you borrow from your 401k but continue to charge you are only digging in deeper while wiping out your savings for an emergency.

more importantly, this assumes you borrow at a lower interest than your credit card, and your 401k is worth paying back (not cashing out).

 

[Brian4Liberty]

how safe is safe?

is it as guaranteed as CD?

If not, haven't most people already lost some of their money as a result?

Yep, you can be a safe as a CD. Many even have the option of CDs. The "safe" options are either insured by FDIC or SIPC.

Most people in 401(k)s had their money in stock mutual funds. Mostly big cap, DOW, S&P 500, 1000, Wilshire indexes. Also financial, tech, emerging markets and real estate related mutual funds. That's why they all took a hit. And they don't pay attention at all to the investments. They invest and forget. Not a good strategy for them. But it was good for Wall St. to have all this dumb money thrown at them for years.

Then again, mining stocks in 401(k)s took a hit too. But they have come back some, and promise to come back more. Bullion funds like CEF didn't do too bad, as they came right back.

A 1 year comparison chart of metals (CEF, GLD, SLV), mining (GDX), and S&P, DOW:

Chart here

Note how much worse S&P and DOW have done...if you played GDX right, you would be really happy.

Of course a cash option over that period would be almost a flat line, with a little interest gain.

 

[Carole]

After mortgage and monthly bills, I am spending the majority of my paychecks paying down credit card debt (totalling about $19K).

I have about 22,000 in a 401k. Because I have almost no faith in the stock market for the forseeable future, I am considering cashing out my 401k to pay off my debts. If I do so, I will be able to put about $1000 into saving and/or other investments each month.

I understand that I'll pay a big penalty on cashing out, meaning I'll actually get a little more than half of that $22,000. But, it will nearly end all my debts (other than mortgage).

Most sites I've looked at strongly recommend against doing this, but I'd like to hear from folks here that are outside the standard government/keynesian mode of thought.

I appreciate any input. Thanks!

Watch carefully to see if Congress takes up a bill to take over (nationalize) the 401K's, This is being bandied about by a few in Congress.

For sure, if that happens, take out your money immediately.