Financial Advise???

[madurolover]

If there are any Financial Advisors on the forum (or just a financial guru) then I have a question for you.

Should I withdraw money from my 401k to pay down my credit card. The interest on the card is going to 19%, my balance is $6000 and I can only withdraw up to $5000 from 401k. Would the penalty on the withdrawal be more than the interest even over time?

This question is being posted for my girlfriend. If anyone could help it would be much appreciated. If anymore information is needed please let me know and I will respond back with it.

[Mugen910]

I am no finance guru but why not just ask the CC company to lower your interest rate or threaten them that you'll transfer the balance to another card that is offering better? I'm not a fan of taking from a 401k for some reason.

[madurolover]

Originally Posted by Mugen910

I am no finance guru but why not just ask the CC company to lower your interest rate or threaten them that you'll transfer the balance to another card that is offering better? I'm not a fan of taking from a 401k for some reason.

The CC company just sent a letter saying they are rasing the interest rate. That is the reason she wants to get it payed down. She does not care to pay it off in full. That way she can still make a minimal monthly payment and it helps toward her credit rating.

[jkim05]

Originally Posted by madurolover

The CC company just sent a letter saying they are rasing the interest rate. That is the reason she wants to get it payed down. She does not care to pay it off in full. That way she can still make a minimal monthly payment and it helps toward her credit rating.

Well, without more information about her income, age, other assets/liabilities, etc, I can't give specific recommendations, but in general, you should avoid pulling out of your 401(k) for any reason. Also, you don't need to maintain a balance in order to improve your credit rating, merely having the account open with credit available and in good standing is enough. Another consideration is one of Obama's campaign promises was to suspend 401(k) withdrawal penalties, in which case it might work out to pull the money out. My suggestion would be to only pull it out if you are planning on putting the money right back in, and I think the best thing to do would be to transfer the balance to another card, at least as much as possible. Go online and search for 0% or low apr balance transfer offers and see what you can get.

[shilala]

I believe the penalty on the withdrawal is 22%.

[St. Lou Stu]

Originally Posted by shilala

I believe the penalty on the withdrawal is 22%.

Not sure about the penalties..... each may vary slightly. Plus income taxes at the end of the year. Unless the 401 institution withholds for you.
Either way, it is taxable income once withdrawn.

But the compounded interest over the life of the credit card debt would exceed the penalties and taxes if I am guessing correctly. I didn't even do the math. 19% is NUTTY.

edit after the fact..... If it isn't being done to pay down in full.... It nullifies the points above regarding the CC interest.
IMHO, if you're willing to take the 401 hit, it must be done to completely resolve the CC debt.

[shilala]

Originally Posted by St. Lou Stu

IMHO, if you're willing to take the 401 hit, it must be done to completely resolve the CC debt.

I agree on all that other stuff you said. Add the penalty and the income tax hit and she might end up with 3k in hand for a 6k debt.
A better option would be to apply for a new credit card and transfer the balance. Especially one with no interst on the balance transfer.
Then cut the credit card in half, eat oodles of noodles for a year, and get it paid off.
Her other option would be to marry a rich guy. That'd probably be quicker.

[madurolover]

Originally Posted by shilala

Her other option would be to marry a rich guy. That'd probably be quicker.

I will see if I can hook her up with one.

Thanks for the responses so far guys. I really did not know what to advise as I have never owned a CC in my life.

[tchariya]

401K withdrawal/loan shouldn't incur a penalty (but interest on the borrowed amount exists). But like any loan, you have to pay it back. Most people forget that paying back into the 401K is with funds from your income that are taxed at your income level (could be as high as 33%).

If you don't pay it back, you default, then penalties get assessed and the amount you withdraw is also taxed as income at your level.

Borrowing from 401K to pay debt is very bad idea. If you don't have money to pay your credit card now, will you have the money built into your budget to pay back your 401K??

The best route is to never use your credit card unless you know you can pay it back. Also try to position yourself into a credit card with a lower interest rate. Also always pay more than your minimum or you will never beat your balance.

[Scottw]

I have been in finance for 13 years and I would advise against taking 401 (K) money out to pay bills especially since you are probably not back up at the level that your 401 was at a year ago thanks to the market. You would be selling a depreciated asset (maybe even at a loss), paying income tax plus a 10% tax penalty (assuming you are under 59 1/2) to pay off a credit card. I would call the CC companies or send them a certified letter that includes the compelling reasons why you cannot maintain your payments to them and see if they can lower the rate. Keep your retirment money until retirement.

[WildBlueSooner]

Originally Posted by Scottw

I have been in finance for 13 years and I would advise against taking 401 (K) money out to pay bills especially since you are probably not back up at the level that your 401 was at a year ago thanks to the market. You would be selling a depreciated asset (maybe even at a loss), paying income tax plus a 10% tax penalty (assuming you are under 59 1/2) to pay off a credit card. I would call the CC companies or send them a certified letter that includes the compelling reasons why you cannot maintain your payments to them and see if they can lower the rate. Keep your retirment money until retirement.

The credit card companies are much more willing to work with you than they act. Not only that but make sre everything else has been done first. Is they anything that can be sold to make some cash to pay it off? A yard sale or something? Do whatever you can to not borrow from the 401k...you will thank yourself later

[croatan]

To avoid an early withdrawal penalty, you can borrow from your 401k. Usually a small fee involved (around $100) and you can borrow up to half the balance of the 401k or $50k, whichever is less. You then pay yourself back from your paychecks (5 years for most loans, 10 years for home loans), plus a relatively low interest rate, which goes right back into your 401k. It's usually a better way to go than taking the withdrawal penalty, I think.

If she only has 6k in there, then this may not be as good of an option as it is for those with more equity. But, again, at least it may be better than the penalty.

If you're fired or leave the company, you have to pay it back sooner, though, or pay the penalty.

***not a financial adviser***

[AAlmeter]

Originally Posted by croatan

To avoid an early withdrawal penalty, you can borrow from your 401k. Usually a small fee involved (around $100) and you can borrow up to half the balance of the 401k or $50k, whichever is less. You then pay yourself back from your paychecks (5 years for most loans, 10 years for home loans), plus a relatively low interest rate, which goes right back into your 401k. It's usually a better way to go than taking the withdrawal penalty, I think.

If she only has 6k in there, then this may not be as good of an option as it is for those with more equity. But, again, at least it may be better than the penalty.

If you're fired or leave the company, you have to pay it back sooner, though, or pay the penalty.

***not a financial adviser***

Donnie,

Along the lines of what this feller said....

http://www.fool.com/personal-finance...csithlb0000001

Has a section on borrowing from your 401k

[N2Advnture]

Not a financial adviser but...if you withdraw from your 401k early you pay the income tax on the earnings as well as a 10% penalty.

Since the market has hit it's low and on the up swing, you'd not only be loosing the 10% + tax but the opportunity to recoup the loses taken in your 401k when the market went down.

My advise would be to open another card with a much lower rate and transfer the balance (many have 0% interest for X months on balance transfers) and then start paying down the credit card before doing anything else (having it paid off prior to the introductory 0% offer expiring).

You may also look into taking a "loan" from your 401k at a low rate.

I don't think any financial adviser would tell you to withdraw from your 401k early.

I hope this helps

~Mark

[Mugen910]

honestly check out Jeremy's advice on transferring the balance to something lower.

[Raralith]

Borrowing from 401K to pay debt is very bad idea. If you don't have money to pay your credit card now, will you have the money built into your budget to pay back your 401K??

That's the main thing here. If you are just doing it to buy time, transfer the balance to another card. Or hell, borrow it from a relative (mom, dad, sister, aunt, whatever) if need be because 19% APR is 1.58% per month. At $6k, you would pay $95 in interest the first month. Try lowering it too if you can't do any of the above.

If you can't do any of the above, and you have to pay the credit card down, you can pay it off in a year if you pay $552.94/month if you buy nothing else on it. You'd also pay $635.27 on interest too, more than 10% of the principle amount.

[chippewastud79]

Often times if you transfer a balance to a new card, not only will you get a lower interest rate, but some of them will offer a period where there is no interest. Usually something between 30 and 90 days. That would not only save you some interest in the long run, but also let you make some head-way on the principal.

[Mugen910]

Honestly if I found out my CC was going up to 1X.XX % I'd be pissed and threaten to transfer CC companies. I know for my Visa I get to call once a year to ask if they can get me in a lower rate and they usually say "Yes" before I pull the "I'm gonna get a new CC company bit.

[Raralith]

By the way, credit markets are a bit more tough now, and most new cards don't start you off at much lower than $6k.

I'd check out these two sites for more info: getrichslowly.com and thesimpledollar.com

They often have responses to these questions and more about all these financial questions of this nature. If you email them with the question, they may be able to respond to you with what they suggest, and usually it's very similar between the two. Even if you don't check them out right now, these are two great sites to check out often just to skim the headlines to see if there is any post that may pertain to you. I only have one CC, and nothing else but school loans, but I'm always finding valuable info that I can hold on to for later, or use now, even as a student.