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Seeking advice on debt - retirement funds vs current debt

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tchrome
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Seeking advice on debt - retirement funds vs current debt  Reply with quote  

Seeking advice from any who know better than me and may be kind enough to offer it.

I've admittedly never been great with money, and now after a tougher than usual few years with a period of unemployment and some unexpected expenses, I have found myself trying to deal with $50k in credit card debt. No matter how much I try to spend as little as possible of my current income each income each month it barely makes a dent in what I owe. Calculating average interest (15%), I have realized I'm not in a good place here.

My question is:
Is it smart or unwise to pay off all my debt now but deplete my investment savings completely?

I have a total of almost $50k in 3 retirement accounts (401k, Roth IRA, and IRA). The total value never seems to change or increase much over the years, and I'm wondering if it would be smarter to cash it out, with early withdrawal penalties, and get this debt paid off as soon as possible before paying too much more interest. I would avoid debt and borrowing in the future and start working towards building some retirement income back up.

I literally have no idea how to do the math to figure out if this is an okay idea or a terrible one, or what the formula is. Any quick advice based on personal finance best practices is greatly, humbly appreciated.
Post Fri Feb 27, 2015 5:57 am
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Publius
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This likely isn't a good idea. The funds in the IRA and 401k will be subject to income tax at your current rate (plus 50,000, so you could be pushed into the next tax bracket) + 10% early withdrawal penalty. The ROTH will be a little less costly as you can withdraw the contributions you have made tax and penalty free, but any gains will be hit with the early withdrawal penalty.

So, if you are in the 25% tax bracket, you will pay 35% on the monies in the 401k and IRA to get the money. So, if 40,000 of the savings are in these two vehicles, withdrawal of that amount will only net you ~26,000. So you will have lost 40,000 in retirement savings to have paid off only half of your debt which was at 15% (less than the one time tax+penalty fee of 35% on your money). This math gets a little fuzzier depending on how many years you would take to pay off the $50,000, but you see you aren't out of the woods by making this move.

There is the option of taking a loan from your 401k that can be repaid at less interest than the 15%, but with it comes the risk that if you leave that job the loan becomes due in full in 30 days otherwise it is treated as a withdrawal and subject to the penalties and taxes discussed above.
Post Fri Feb 27, 2015 1:55 pm
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oldguy
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quote:
almost $50k in 3 retirement accounts (401k, Roth IRA, and IRA). The total value never seems to change or increase much over the years,


The US Markets averaged 16.4%/year over the most recent 5 years - so your $50k would have doubled. That doesn't help your present problem but fixing it will affect your future in a big way.

quote:
Calculating average interest (15%), I have realized I'm not in a good place here.


Yeah, keep the 401k and IRA accounts. And cash out the Roth.
Then look for less expensive loans, collateralized loans (car, house) are much cheaper than revolving credit signature loans.
Post Fri Feb 27, 2015 3:31 pm
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littleroc02us
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I wouldn't cash out retirement accounts in total to wipe out that amount of debt. I remember when I was drowning in debt in my late twenties. There wasn't anything I didn't buy and it almost broke me. I got so sick and tired that I cut up my credit cards, except 1 and never used them. I got two extra jobs and sold anything I could find and paid off all of the debt in less then 5 years.
I now sleep much better these days not having any consumer debt. We don't carry balances on our credit cards and we have a lot of equity in our homes. I don't care what anyone says, debt isn't a good thing. My wife and I have amassed a high networth for our age avoiding as much debt as possible and having more disposable income to invest with.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Fri Feb 27, 2015 4:07 pm
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tchrome
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Thank you all for the very helpful replies and advice. Now that I see the math on 401k and IRA cash out optiona, its true it no longer looks appealing and doesn't really solve the problem. I will have to figure out longer term strategy. I also will look into only cashing out the Roth to get things jumpstarted, since it doesn't come with as many drawbacks. Great to understand this.

Why my retirement accounts aren't making more money in general is also something I'll look into again, maybe with some professional help. Not sure why they are not performing better.

And agreed about eliminating the use debt going forward. I've stopped using credit cards completely and am working on budgeting and I do plan to keep this in place in the future, to be on the safer side. I will figure out a plan to get rid of this debt no matter how long it takes.

Thanks to all again.
Post Fri Feb 27, 2015 6:50 pm
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oldguy
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quote:
to be on the safer side. I will figure out a plan to get rid of this debt no matter how long it takes.


Good - and try to get better loans, that 15% is a killer. Do you have assets - a car? A house?
Post Fri Feb 27, 2015 6:54 pm
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tchrome
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quote:
Good - and try to get better loans, that 15% is a killer. Do you have assets - a car? A house?


I do, although I still owe on both of those also. I am paying down a home loan for a condo I own (and rent out) in another city, which is for $165k at 2% interest and an auto loan that is roughly $5k at this point. No changes planned for upcoming years for home or auto.
Post Tue Mar 03, 2015 9:53 pm
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oldguy
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Do you have equity in the condo & car? Ie, can you refi them to raise some 'under-15%' so that you can kill some of that toxic $50,000 debt? I have used both, I refi our rental houses to raise money - and I finance our cars.
Post Wed Mar 04, 2015 2:31 am
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tchrome
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I do have some equity built up in the condo. However doing a refi may be counter productive if my interest rate goes up. I have a 2% interest rate currently, which happened when an Arm I had adjusted automatically during the downturn in real estate years ago.

I am looking into this to determine if its an option. Thanks for the suggestion!
Post Wed Mar 04, 2015 6:45 pm
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tchrome
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Would the goal here be to get some cash out from the equity I've built up to date, or roll some/all of the remaining higher-interest credit card debt into my home loan (if possible)? My research seems to be pointing to multiple options. Guessing the first option is the one to focus on.
Post Wed Mar 04, 2015 7:11 pm
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oldguy
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I would refi the condo - 2 goals, one is to get rid of that VAR and get locked into a 30 yr FR loan, and (2) to get $50,000 to clear that toxic 15% loan.
Post Wed Mar 04, 2015 8:14 pm
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tchrome
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This sounds great. I will be looking into my options here immediately.

Thank you kindly.
Post Wed Mar 04, 2015 9:34 pm
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Wino
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You need to write down a budget and stick to it. There are only two ways to pay off debt: spend less or make more. You need to stop eating at restaurants, going to movies, concerts, sporting events... basically, cut your lifestyle to lower than your income, and use the extra money to pay off debts.

I make very good money. Even so, I only go out to eat 20% of the time I could easily afford to go out. I also stay home with friends rather than going to bars. I don't have cable TV. My cell phone is paid for by my company.

When I started, I had $300K in debt. (Yes, you read that number correctly). I am now debt free except my primary residence, which I could pay off this year, except I'm instead squirrelling away additional emergency funds in case of a layoff. I'm in the oil patch, and in my sector (service) there have already been massive layoffs. If I become one of those victims, I'd prefer to have enough money to tide me over until oil prices come back to the $70 to $80 range.
Post Thu Mar 05, 2015 5:37 am
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