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Old 09-20-2011, 12:18 AM
Btwint Btwint is offline
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Default Another 401k-CC scenario...but on a smaller scale

First want to say this forum is great. Everyone is very helpful and the advice seems to be very sound.

I have looked at all the other post about cashing out 401k to pay off credit card debt and other things. My situation is very similar but on a much smaller scale. I am 28 and I have around 30k in 401k. I am in the process of changing jobs and will need to do something with my 401k. Each year we seem to gather some cc debit and try to pay it off with my current employers end of year bonus and our tax refund. The job I will be going to is basically a lateral move in pay minus the bonus.

Our CC debt is around $6,500. I was thinking of taking care of this when I roll over my 401k. If I did a partial pay out (lets say 10k). I am aware 20% will be withheld for tax purposes and I will pay a 10% penalty. I am in the 15% bracket so it will cost me around 2,500 in fees plus SC state tax which can be withheld if I ask them during the pay-out. So here is my question and I hope my math is correct.

With $6500 credit card debt if I manage to pay $230 a month ($80 is interest) it will take me 44 months to pay this off. That being said I would have paid something like $3,400 interest. The $230 is a what-if and what-ifs don't always happen the way we plan.

Is it smart to go ahead and get this behind us when I change jobs? Like most on here we just want to be free of this. I would like to be able to start saving more and I know that comes with spending less. I would just feel better if I were debt free and we could have a fresh start, knowing this cant slowly creep up again. I know its going to cost a penalty but with this amount it seems the penalty is about equal to the interest I would pay anyway.

Either way I will need to do something with my current 401k, either its going to be 20k or 30k to be rolled-over, what should it be rolled over to. My new employer has a 401k plan which I will be eligible after 90 days. Should I roll it over to this or should I use something else?

Thanks for your help and I look forward to any suggestions.
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Old 09-20-2011, 10:41 AM
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DavidBibby DavidBibby is offline
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Default Re: Another 401k-CC scenario...but on a smaller scale

Btwint..

I would say do it... IF.. you also put $1000 in a savings account and cut up the credit cards and never borrowed money again.

I think that if you started with a clean slate you would more than make up for the penalties incurred from using your 401(k) this way.

But... having said that.. when we do stuff like this... we haven't really learned how to GET to debt free and stay that way... the rationalization to use credit keeps coming back.

I've done these steps before... and I honestly don't regret my decisions here.

Others can chime in here... and my perspective is only one of many great people here....

I say go for it.

David
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Old 09-21-2011, 10:33 AM
Btwint Btwint is offline
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Default Re: Another 401k-CC scenario...but on a smaller scale

Thank you for your response. I will be going ahead with this and will also need to roll over the balance to something else. Should I put it in my new employers 401k plan or look into an IRA. Never really looked into these options and I do not know a lot about them. Thanks again for your response and I look forward to hear from you.

Chris
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Old 09-22-2011, 08:31 AM
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DavidBibby DavidBibby is offline
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Default Re: Another 401k-CC scenario...but on a smaller scale

Quote:
Originally Posted by Btwint View Post
Thank you for your response. I will be going ahead with this and will also need to roll over the balance to something else. Should I put it in my new employers 401k plan or look into an IRA. Never really looked into these options and I do not know a lot about them. Thanks again for your response and I look forward to hear from you.

Chris

Chris,

It's probably better to roll it into your new company's 401(k). If they offer a match then it will help you build up your account back to what it was a little bit more quickly as you make new contributions to it.

The IRA or ROTH IRA is a good 2nd best choice. You don't get a company match and it has lower annual limits that you are allowed to contribute to it.
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