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Established Contributor
awdsmama
Posts: 756
Registered: ‎01-20-2012
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Cash out 403b to pay credit cards or not?

I am posting for a friend because she's not quite sure what to do. 

 

She currently owes:

Homestreet: $4400  at    22%

Chase: $250          at       29%

Chase: $1300       at        29%

Chase: $3700       at        29%

Cap1: $1900         at        17%

Cap1: $400           at        17%

Orchard: $1500    at        18%?

 

Total Credit Card debt:  $13,450

 

 

She is about to graduate college with a bachelors and approximately $50k in student loan debt.   Her last class ends in December and repayments will start in June or July at between  $500 - $600 a month.

 

 

She will be receiving an inheritance from her grandmothers estate of $10,000.  They are in the process of settling hte estate right now, not sure when the money will come in.

 

She wants to put that money to her CC debt. 

 

She has $4,800 in a 403b at an old employer (on top of her 401k at current employer).   

 

She is 32 years old, married with 3 kids.   She is currently contributing  6%  towards her 401k with an employer match of 4%

 

She is toying with the idea of cashing out the 403b, taking the penalty hit and combining that with the estate money to pay off the credit cards.

 

 

She is trying to get rid of that CC debt before student loan repayment begins since there is not enough $$ in the budget to pay ALL of it!

 

Pro's / con's / alternate ideas are all welcome!!!!  

 

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Senior Contributor
youngandcreditwrthy
Posts: 6,242
Registered: ‎08-16-2012
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Re: Cash out 403b to pay credit cards or not?

IMO,

she should NOT cash out her 403b to pay off cc debt...

 

This is per Suze Orman...

 

Reasoning: 403bs are like 401ks and are PROTECTED in case of bankruptcy- and taking a 20% tax hit is BAD, esp if her investments have already been underperforming.

 

So, imo, she should maybe pay down half of her debt ($5-7K of cc debt) with the inheritance, and try to bal xfer the rest to a 0%, then PAY IT OFF and stay out of debt. SAVE some of the inheritance for emergency cash flow purposes. Paying off half of it and lowering the rate will free up cash flow. Many cards offer 15-18 mos at 0%, but require higher credit scores (650+). Look into: Chase Freedom, Discover Motiva, Citi Diamond/Thank You.

 

NEVER, EVER, EVER cash out a retirement plan to pay debt, esp if you have no plan to STAY out of the debt that you got in trouble to begin with. Furthermore, if her income cannot keep up with her expenses, that is a very problematic issue, and she is only delaying the inevitable.

 

I hope this helps. 

 

 

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Regular Contributor
my25reasons
Posts: 177
Registered: ‎12-16-2011
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Re: Cash out 403b to pay credit cards or not?

I don't see the harm in it. She is paying aggressively into a 401k and the 403b is a pretty small amount.  The only downside I see is that she will probably only get back about 2/3 of it after calculating in the tax hit. 

 

Having that cc debt hanging over your head is daunting. I can see where this would be an ideal situation to just be done with it. However, sometimes paying off debt is an easy way to charge up new debt. The old reminder is no longer there and it's easy to get carried away. I know I've done it.

 

If it were me, I would pay off the 10k and move the remaining amount owed to a no interest rate cc and pay as aggressively towards that as I could - save the cash out for when there are no other options.

 

 

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Valued Member
spartanspirit
Posts: 46
Registered: ‎08-16-2011
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Re: Cash out 403b to pay credit cards or not?

while i admire and respect suze orman and watch her every saturday night (hey girlfriend), i dont always agree when she says do not withdraw or take a loan against your 403b or 401k. Suze Orman is worth tens of millions of dollars, so she's never had to tap into "other" sources to pay bills. Not everybody can apply and be approved for a personal loan or 0% credit card, or have family or friends they can borrow from, so unfortunately those 401k or 403b funds may be the only option. The 403b amount is relatively small, and the tax penalty not that large in the grand scheme of things in my opinion. 403b funds may be protected in bankruptcy, but student loans are not. Since she is contributing to a 401k at her other job, i say go for it. I do agree with the other posters to be responsible with the zero balance credit cards after they are paid off. as stated, too many people get back into debt faster then they got out of it.



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Established Contributor
awdsmama
Posts: 756
Registered: ‎01-20-2012
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Re: Cash out 403b to pay credit cards or not?

[ Edited ]

FWIW my suggestion to her was....

 

Pause current 401k contributions for a few months and put the $129 a check or $258 a month towards the credit cards.   Do that for 16 paychecks (taking her to the end of May, right before Student Loan repayment starts)  and she'd be able to wipe out:

 

 

Chase: $250         

Chase: $1300      

Cap1: $400           

 

Leaving her with $11,500 ( not accounting for minimum payments being made etc – that’s just going off of your balances as of today.)

 

Put the $10,000 estate towards that balance….

 

Now she's down to roughly $1,500 (not counting min pmts made..)

 

I bet there are ways to save that out of a budget out of the next 7months before student loan repayment begins.

 

And yes, I know pausing contributions may be unpopular idea but IMO, you’re pausing contributions/match for awhile but that’s only 10% (6%cont+4%match)   compared to the 30-35%  lost upfront cashing out 403b  not to mention all the future earned interest lost if she cashes out.

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Regular Contributor
tylaw13
Posts: 173
Registered: ‎06-28-2012
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Re: Cash out 403b to pay credit cards or not?

[ Edited ]

awdsmama wrote:

FWIW my suggestion to her was....

 

Pause current 401k contributions for a few months and put the $129 a check or $258 a month towards the credit cards.   Do that for 16 paychecks (taking her to the end of May, right before Student Loan repayment starts)  and she'd be able to wipe out:

 

 

Chase: $250         

Chase: $1300      

Cap1: $400           

 

Leaving her with $11,500 ( not accounting for minimum payments being made etc – that’s just going off of your balances as of today.)

 

Put the $10,000 estate towards that balance….

 

Now she's down to roughly $1,500 (not counting min pmts made..)

 

I bet there are ways to save that out of a budget out of the next 7months before student loan repayment begins.

 

And yes, I know pausing contributions may be unpopular idea but IMO, you’re pausing contributions/match for awhile but that’s only 10%   compared to the 30-35%  lost upfront cashing out 403b  not to mention all the future earned interest lost if she cashes out.


i would not stop contributing to the 401k because A) that 129 is pre tax so if shes not contributing she is paying more taxes B) The take home on her check will not change alot. Cash out the 403b because it is such a small amount and she isnt contributing to it anymore. Even though 403b and 401k are safe from BK you dont want that alone to cause a BK because you didnt want to cash out the 403b. I hope this is understandable.

 

Also if she has a company match then she will be missing out on FREE money.

 

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Senior Contributor
Walt_K
Posts: 3,065
Registered: ‎11-02-2009
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Re: Cash out 403b to pay credit cards or not?

[ Edited ]

Is taking a loan an option?  I don't know if you can take them from 403b accounts, but you can generally take out loans from a 401K account (check your plan documents).  This would avoid the tax penalty.  Yes, there are pros and cons to this as well, and if you lose your job, you have to pay the loan back quickly (90 days?) or you take a penalty, but if the alternative is that you are going to cash out, you're already taking the penalty. 

 

The interst on the 401K loan is going to be a lot better than the interest on the credit cards, and you're paying it to yourself.  Of course, if there still isn't enough in the budget to make the payments, that doesn't help.


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Senior Contributor
youngandcreditwrthy
Posts: 6,242
Registered: ‎08-16-2012
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Re: Cash out 403b to pay credit cards or not?

You can prob transfer over the 403b to the 401k without any tax penalties .... I know that people run into problems, trust me... but I am simply suggesting for you to not cause any additional financial strain by losing money on cashing in your investments.

 

Here's the real advice....

 

use a ROTH 401k, so that you can withdraw principal tax free in the future (in the case of an emergency)....

 

Roth investment vehicles really are the way to go.... I've had to take hits on investment accounts before, even at 23, and it's not fun to lose money....

 

To be honest, you are better of putting your energy towards getting all those rates down to a 0% card or negotiate with the creditors IF your credit is in good enough standing to do so....

credit card debt by itself will not cause too much financial strain; it's when the debtload becomes unsustainable that you get into trouble.

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Senior Contributor
youngandcreditwrthy
Posts: 6,242
Registered: ‎08-16-2012
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Re: Cash out 403b to pay credit cards or not?

+1 Tylaw..... you CANNOT BEAT a 50% return.

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Established Contributor
sjt
Posts: 721
Registered: ‎05-05-2010
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Re: Cash out 403b to pay credit cards or not?


awdsmama wrote:

I am posting for a friend because she's not quite sure what to do. 

 

She currently owes:

Homestreet: $4400  at    22%

Chase: $250          at       29%

Chase: $1300       at        29%

Chase: $3700       at        29%

Cap1: $1900         at        17%

Cap1: $400           at        17%

Orchard: $1500    at        18%?

 

Total Credit Card debt:  $13,450

 

 

She is about to graduate college with a bachelors and approximately $50k in student loan debt.   Her last class ends in December and repayments will start in June or July at between  $500 - $600 a month.

 

 

She will be receiving an inheritance from her grandmothers estate of $10,000.  They are in the process of settling hte estate right now, not sure when the money will come in.

 

She wants to put that money to her CC debt. 

 

She has $4,800 in a 403b at an old employer (on top of her 401k at current employer).   

 

She is 32 years old, married with 3 kids.   She is currently contributing  6%  towards her 401k with an employer match of 4%

 

She is toying with the idea of cashing out the 403b, taking the penalty hit and combining that with the estate money to pay off the credit cards.

 

 

She is trying to get rid of that CC debt before student loan repayment begins since there is not enough $$ in the budget to pay ALL of it!

 

Pro's / con's / alternate ideas are all welcome!!!!  

 


What about rollong over the 403B funds from her old employer to her current 401K and then take out a loan. Reduce the 401K contribution just enough to get her employer match.

 

 

 


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